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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 January 31, 1999
Commission File Number 33-20783-D
ALPHA BYTES, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1064958
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
521 BUFFALO AVENUE, NIAGARA FALLS, NEW YORK 14303
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, 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
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The aggregate market value of voting stock held by non-affiliates of the
Registrant was $3,734,000 based on trading reported in the NASD pink sheets on
or about JANUARY 31, 1999.
There were 7,468,002 shares of common stock outstanding having a NO par value
per share as of JANUARY 31, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE:
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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warrants are no longer valid.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
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Item 1 General Development of Business.
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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 6,000 sites
(equivalent to more than 39,000 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
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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).
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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 using the Internet for electronic communications, (the Alpha POS
system); home office management (the Alpha H.O. system); independent
optometrists (the Alpha PM system); small labs & superstores (the Alpha Lab
system); and, large wholesale labs (the Alpha Lab system).
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, Microsoft, Compaq, Bell Microlinks (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
1998) with Alpha Bytes INC. for marketing of the H-NET Healthcare Internet Based
Network.
BUSINESS DEVELOPMENT
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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.
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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 exist.
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).
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).
In 1998, the company concentrated in marketing the new "Windows" driven
systems plus accumulating all required material for the design of the H-NET
system. In the 4th Qtr the company hired three software specialists, and an
internet specialist to embark on creating H-NET and the company purchased server
high power Compaq computers to house the networks. Additionally, the over all
network Internet based network, the digital link and the network communications
of a cross platform were created in this quarter.
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
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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 providers to authorize credit/debit card transactions
and supports financial services such as paying bills.
The term "suppliers" (as used in this section) refers to retail and
wholesale laboratories and lens/frame manufacturers. The OMA (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 messaging over the Bell Microlinks/other networks.
Currently, H-NET can communicate on a real time basis through the Internet
to NPA for adjudication of claims. Alpha Bytes INC. is working with other
insurers, Including Vision Services Plan, 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 entity other than Alpha Bytes INC. that is
attempting to interface directly through the Internet with insurance companies
for the direct transmission of vision care non-medical claims (e.g. claims
involving frames, lenses, add-on's and accessories).
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DEMAND FOR SERVICES
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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.L.I., EYE-COM and B.R.C., its major competitors,
as a result of its ability to offer prospective corporate chain clients a
complimentary service not available from such sources. Alpha Bytes' 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 the health care provider's interest to pay for electronic
transaction eligibility checking/processing.
Health care providers do not generally pay transaction fees for placement
of product orders to frame, lens, medical goods 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%).
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 where the Internet
will play a large part.
STRATEGIC ALLIANCES
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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 co-ordinator, software development and support services;
Microsoft for Operating Systems/Databases/Application software, NDC for Claims
processing; Bell Microlinks, responsible for general H-NET communication
services and financial services communications; NPA and NVA, 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 and Compaq for hardware.
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
transactions per year for credit cards, financial, and other commercial
services.
Bell Microlinks, through its worldwide communications capability, handles all
the communications needs of H-NET. Through Bell Microlinks, H-NET offers a
"local network" that spans the globe and provides worldwide access.
NPA and NVA, 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
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In conjunction with Microsoft, Compaq, NDC and NPA, Alpha Bytes INC. is
presenting products introducing the "Internet Based Vision Care Superhighway",
which management believes will be actively marketed in 1999.
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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 world-wide 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,
hardware services and Internet services in traditional fashion by availing
itself of opportunities to demonstrate products and their effect on a client's
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
seven trade shows.
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
Internet based umbrella, to market a third party 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.
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 $0.50. 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 $15,000 - $100,000
and the LAB/2/ software is priced between $ 5,000 - $25,000.
Alpha Bytes INC. is able to offer the health care providers claims
processing at a minimum baseline per transaction charge of less than $0.50 in
concert with a more competitive percentage charge based on value levels of
claims, 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. 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's. Technology delivers more competitive prices and greater
savings.
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/NVA, 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 `99/'00 as the required interfaces are developed for vision care and
non-medical claims. However, to accomplish its plans in completing development
of marketing H-NET over the next fiscal year, management feels that Alpha Bytes
INC. will require about $5,000,000 in debt or equity financing.
FACTORING SERVICES
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Many health care providers are interested in selling their account
receivables in order to alleviate the 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 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 due to verified/guaranteed
eligibility.
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DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES
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MARKETING PLANS AND DISTRIBUTION
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Management believes that there are intrinsically linked opportunities in
North America, the United Kingdom and the EEC. 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 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 interfacing 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 prices
prescriptions; manages all financial information; and keeps track of staff
performance. It also includes special features for optometrists.
"Alpha HO/2/" is a cross-platform, Windows (Registered 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.
"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/wholesale
laboratories.
The Internet based "H-NET Transaction Network" is a software product that
allows the user to process payment claims and order goods and services with
access to electronic communications networks. H-NET features 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
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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 Internet transactions
is a very large and untapped market as is evident from the following estimates.
<TABLE>
<CAPTION>
TOTAL ANNUAL GROSS
Service Type TRANSACTIONS PROFIT
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<S> <C> <C> <C>
1. Spectacle Insurance and Government Claims 27,200,000 $0.25
2. Health Care Provider Claims 9,000,000,000 $0.25
3. Third Party Eligibility Checking 27,200,000 $0.25
4. Prescription Orders to Laboratories 80,000,000 $0.25
5. Lens Orders to Supplier 16,200,000 $0.25
6. Frame Ordering 54,700,000 $0.25
</TABLE>
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<TABLE>
<S> <C> <C> <C>
7. Contact Lens Ordering 16,200,000 $0.25
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. ElectronicBanking 27,200,000 $0.005
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</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 1997 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 $800M.
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 3 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.
MARKETING PERSONNEL
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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 by existing Alpha Bytes INC.
staff members, including Anton Stephens, Ray Coty, Doug Winter and Kevin Walker.
Mr. Stephens, president of Alpha Bytes INC., whose background includes
management and development of the nation-wide 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-dealerships.
Mr. Coty, Alpha Bytes INC.'s Vice President of Operations, has over 15
years of experience in communications, network management and various other
development projects.
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. Walker, Alpha Bytes Inc.'s National Sales & Marketing Manager, is a
licensed optician and has managed his own retail locations.
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STATUS OF ANY PUBLICLY ANNOUNCED NEW PRODUCT OR SERVICES
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H-NET HEALTHCARE NETWORK
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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 Lens and contact lens 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 its alliance partners who have recently
agreed to actively get involved in marketing H-NET to their customers and to use
it as an enticement to Increase the growth of their own businesses. 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 $0.10, 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. Multiple
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.
SECOND GENERATION POINT OF SALE, HOME OFFICE, AND LABORATORY MANAGEMENT SOFTWARE
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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 is accumulated in the databases.
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 provide the user with
9
<PAGE>
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
optimised 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 customisation 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 market, commencing in 1998, and
the impact in fiscal 1999 was significant. Management anticipates that, as this
product is better known throughout the ophthalmic community, its impact on
income in fiscal 2000 will be even greater than in fiscal 1999.
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 800 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. Alpha Bytes
INC.'s major competitor is R.L.I., a company based in Peoria, Illinois, with a
limited base of chain clients.
Competition for laboratory business centres on the ability to modernise old
systems. There are three major competitors, B.R.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.
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 successfully
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.
10
<PAGE>
Alpha Bytes INC.'s competitors in the third party medical processing
industry offer similar services but at higher price and generally do not have
the ability to transmit electronic orders to suppliers.
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 Microlinks)
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 to multiple
supplier proprietary directories. 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 Centres 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.
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.
11
<PAGE>
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 $850,000 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. In Fiscal 1999 alone the company spent
over $450,000 in R&D for the H-NET project.
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 EMPLOYEES
- -----------------------------------------------------------
The Company has twenty-one 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 fixed 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 capital assets of the Company, as valued for accounting purposes, have
a depreciated book value of $95,538. Furniture consists of two sets of
boardroom furniture, two sets of waiting room furniture, six sets of executive
office furniture, desks, filing cabinets, bookcases and occasional furniture for
the staff.
12
<PAGE>
The key equipment consists of an IBM RISC 6000 computer; 30 Pentium
computers, 1 486/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 (NF).
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
comprising 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 five year leases. The
annual base rental was $23,500 for the year ending in January 31 1999 and the
rent is expected to be the same for fiscal 2000. The premises comprise of 5000
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 may be required, after December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
AlphaBytes Computer Corporation (AB), the Canadian subsidiary of Alpha Bytes
INC., is a party to a litigation against Guther Slaton, Sally Engle and
Profitable Packaging Concepts (PPC) Inc. stemming from perpetrated agreements
relating to the operations of Systems By Design Inc (SDI), a company in the
packaging business. In April 1997, an arbitrator in NY issued an award in favor
of Slaton, Engle and PPC, against AB, Anton Stephens, SDI and Peter Markus
jointly and severally. This award totals approximately $405,000, including
interest.
A motion to vacate the award of the arbitrator has been granted by the New York
Supreme Court in part, with reference by the Court to the Arbitrator to consider
whether a previously undisclosed judgement held by Slaton against Peter Markus,
who was to have represented Alpha Bytes and Stephens at the original
arbitration, prejudiced their defence in that proceeding. Mr. Markus, purporting
to be a New York attorney, failed to submit any documents in the defence of the
claim and failed to put forth any counterclaim on behalf of Alpha Bytes or
Stephens even though there was strong evidence available of losses sustained in
this transaction which had been brokered by Markus.
In the event the order is not vacated, according to Canadian Law any order
against a Canadian company will need to be re-heard in a Canadian Court prior to
enforcement. In the opinion of Management, the ultimate disposition of these
matters will have no material adverse effect on the company's financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------
NONE
13
<PAGE>
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
from market makers.
<TABLE>
<CAPTION>
ASK BID
--- ---
Quarter Ended High Low
------------- ---- ----
<S> <C> <C>
April 30, 1998 $0.62 $0.56
July 31, 1998 $0.87 $0.68
October 31, 1998 $0.68 $0.56
January 31,1999 0.50 $0.40
</TABLE>
The number of record holders of Common Stock of the Company as of January
31, 1999, were 169. 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 92.
ITEM 6 SELECTED FINANCIAL DATA.
- ------ -----------------------
The following table summarizes selected historical financial information of
Alpha Bytes, Inc. as of January 31,1997, and 1998, and for the fiscal years
ended January 31, 1997, 1998, and 1999.
Condensed Balance Sheet Information:
- ------------------------------------
<TABLE>
<CAPTION>
Years Ended January 31,
1999 1998
---- ----
<S> <C> <C>
Current Assets $1,486,573 $1,606,042
Capital Assets 95,538 63,300
TOTAL ASSETS 1,582,111 1,678,021
TOTAL LIABILITIES 302,299 302,299
Stockholders' Equity 1,334,248 1,375,722
- -------------------- ---------- ----------
</TABLE>
Condensed Statement of Operations Information:
- ---------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Revenue $1,644,821 $1,779,133 $1,432,268
Expenses 1,014,208* 973,414 837,184
Gross Profit 630,613 805,719 595,084
Net Gain (Loss) 300,886 500,768 342,284
Net Earnings (Loss) Per Share 0.040 0.067 0.048
- ----------------------------- --------- ---------- ----------
</TABLE>
. INCLUDES H-NET R&D EXPENSE OF $364,363
14
<PAGE>
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, 1998 and January 31, 1999.
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.
Alpha Bytes, INC. has no active income save for the activities of the Alpha
Bytes Group. Therefore, the financial information regarding the parent company
and its two subsidiaries are presented on a consolidated basis.
Revenues were $1,644,821 for the fiscal year ended Jan 31, 1999 generating a
gross profit of $630,613 as compared to revenues of $1,761,402 for the fiscal
year ended Jan 31, 1998 which generated a gross profit of $805,789.
Expenses were $1,014,208 for the fiscal year ended Jan 31,1999 as compared to
$955,638 for the period ending on Jan 31, 1998.
Earnings were $300,886 for the fiscal year ended Jan 31,1999 as compared to
$500,768 for the period ending Jan 31, 1997.
Overall, the major costs were R&D for the H-NET project, which began in the 4th
Qtr, wages and commissions, management fees, office and general, and rents for
both periods. Despite investing over $465,000 ($364,363 with Investment Tax
Credit) and through careful cost tracking, the company still turned a profit.
The Revenue figures were lower in the 4th Qtr due to product implementation held
back until the Phase I H-NET components are incorporated. Revenues declined by
8% and earnings declined by 66% over previous fiscal year, primarily due to the
company investing its own cash for the development of H-NET.
The cash position of the company increased to $1,242,908 from $921,191 in the
previous fiscal year, providing a healthy cash reserve. Retained earnings rose
from $1,347,893 to $1,648,779 on Jan 31, 1999 reflecting a very successful year
for the company. Current assets as a whole changed from $1,606,042 to
$1,486,573.
The overall declines in the Revenue and Earnings are directly attributed to
the company's R&D ( $465,028) investment into H-NET and its holdback on the
release of the new versions of the systems till Phase I of H-NET is incorporated
into these products. The company expects to be back on track from the 3 Qtr of
next year with Phase I, H-NET incorporated. It is expected that these products
will be marketed aggressively through fiscal 2000, where the impact will be even
greater. The company received a credit of $ 100,665 against its R&D costs.
In order to achieve state-of-the-art communications and power, the company
started building its infrastructure by hiring three software specialists and an
Internet specialist. In addition, the company also purchased several high power,
scalable Compaq computers to house the networks. A high speed digital ISDN
Centrex micro-link was also installed as a carrier and the overall network
infrastructure and platform, as well as the digital link, was activated.
In addition, a value added network with multiple web sites, an Intra net, an
Extra net, a certificate site, multiple file transfer sites, a secure fund
transfer site, a random cryptology key generator and a virtual data
mapping/translating sites were created.
In the central hub, a powerful engine driven by two data base servers, a gateway
between processor engine and Alpha Bytes INC's software and various trading
partners was also created.
"Year 2000 Issue"
- -----------------
All of the companies new systems are year 2000 compatible and the company does
not expect the "Year 2000" issue to affect its operations, networks, operating
systems or the computers.
15
<PAGE>
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 $5,000,000 will
need to be raised. The funds will be primarily used to complete development of
the later phases of H-NET, increase the marketing effort and for the production
of marketing material, as well seeking entry to NASDAQ small caps. Marketing
effort would be increased by hiring a sales staff of six salesmen, and
increasing the number of national/regional 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 H-NET Internet based, transaction
driven system in conjunction with 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 with on-line real-time third party claims
adjudication will begin late 2/nd/ Qtr.
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 2000, the company expects to start updating existing users
with new versions of the systems, containing Phase I H-NET components that
provides Internet based technology with electronic eligibility checking, claim
submission, Lab Order submission and various credit card/debit card
functionality.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------
Included at Pages 22 through 33 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.
16
<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.
FIRST ELECTED
NAME AGE OR APPOINTED/TERM POSITION
- ---- --- ----------------- --------
Anton Stephens 47 * Chairman and CEO
Christine Stephens 44 ** Secretary and Director.
- --------------------------------------------------------------------------------
Notes to table:
* Elected on December 3, 1994, 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.
** Elected on December 18, 1994, 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 47, 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. The consolidated
Alphabytes companies have 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 is responsible for the overall strategic planning and Mrs.
Stephens is responsible for the day to day operations. 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
Morgard 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 Alphabytes Computer Corporation, and served as a director and secretary of
Alphabytes Management INC.
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.
17
<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* 1998 *** ** *** *** *** *** *** *** ***
Christine Stephens+ 1998 *** ** *** *** *** *** *** *** ***
Doug Winter (1) 1998 $65,000 *** (4) (4) *** *** *** *** ***
Alex Nobre(2) 1998 $50,000 *** (4) (4) *** *** *** *** ***
Ray Coty(3) 1998 $65,000 *** (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
** The Alpha Bytes INC paid an annual management fee of $272,000, to
Alphabytes Management, INC., a corporation organized under the laws of the
Canadian ProvInce of Ontario and wholly owned by the Stephens Family. Mr.
Stephens is provided with use of a vehicle on which the Alpha Bytes Inc.
spent $4,000.
*** None.
(1) Mr. Winter is a Systems Manager
(2) Mr. Nobre is a Project manager
(3) Mr. Coty is the Vice President of Operations
(4) Expected to be among the persons to whom a 500,000 share from a reserved
block will be awarded, when the Board of Directors develops criteria for
awards.
________________________________________________________________________________
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 the Alpha Bytes Inc. To date, 164,000
such shares have been reserved and options thereto issued to employees. The
options are valid from May 1, 1996 to October 31, 2001 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.).
18
<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
the Alpha Bytes INC. paid an annual management fee during the 1997 fiscal year
of $36,000 of a total invoiced amount of $145,000 to Alphabytes Management INC.,
a corporation organized under the laws of the Canadian ProvInce of Ontario.
Alphabytes 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>
/*/ Majority owned by Anton and Christine Stephens
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, 1999.
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 Merill Lynch Beneficial
1850 K Street N.W. 5,500,000 shares
Suite 700, Washington
DC 20006
</TABLE>
The major stockholders of Pinewood Resources are Anton Stephens and Christine
Stephens.
19
<PAGE>
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>
NAME AND AMOUNT AND
TITLE ADDRESS OF NATURE OF PERCENT
OF BENEFICIAL BENEFICIAL OF
CLASS OWNER OWNER CLASS
- ----- ----- ----- -----
<S> <C> <C> <C>
Common Anton & Christine Stephens Beneficial 72%
Stock c/o Alpha Bytes 5,500,000 Shares
205-7050 Woodbine Avenue
Markham, Ontario, Canada L3R 4G8
</TABLE>
Owned of record by Pinewood Resources.
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
NAME TO COMPANY IN THE COMPANY INTEREST YEAR
- ---- ---------- -------------- -------- ----
<S> <C> <C> <C> <C>
Anton Stephens Officer, Director + $4,000 1998
& Principal Stockholder + $4,000 1999
</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 $272,000 to Alphabytes
Management, INC., a company, wholly owned by the Stephens family.
+ Mr. Stephens is provided with use of a vehicle for which Alpha Bytes pays.
20
<PAGE>
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, July 31, 1997 and January 31, 1996 F-4
Statements of Operations, Year Ended January 31, 1997 F-5
Year Ended January 31, 1996 and
Year Ended January 31, 1995.
Statement of Cash Flows, Year Ended January 31, 1997 F-7
Year Ended January 31, 1996 and Year Ended
January 31, 1995.
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
21
<PAGE>
ALPHA BYTES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1999
(Expressed in U.S. Dollars)
22
<PAGE>
ALPHA BYTES, INC.
JANUARY 31, 1999
INDEX
24 AUDITORS' REPORT
25 CONSOLIDATED BALANCE SHEET
26 CONSOLIDATED STATEMENT OF EARNINGS
27 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
28 CONSOLIDATED STATEMENT OF CASH FLOW
29-33NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
<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, 1999 and January 31, 1998, 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, 1999
and January 31, 1998 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, LLP
Chartered Accountants
Toronto, Canada
March 4, 1999
24
<PAGE>
ALPHA BYTES, INC.
CONSOLIDATED BALANCE SHEET
AS AT JANUARY 31, 1999
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Note 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT:
Cash $ 283,722 $ 171,752
Available-for-sale securities 2 959,186 749,439
Accounts receivable 217,084 666,234
Prepaid expenses and sundry assets 26,581 18,617
---------- ----------
1,486,573 1,606,042
LONG TERM:
Capital assets 3 95,538 71,979
---------- ----------
TOTAL ASSETS $1,582,111 $1,678,021
========== ==========
LIABILITIES
CURRENT:
Accounts payable and accrued liabilities $ 45,118 $ 92,424
Income taxes payable 134,565 155,285
Deferred Income taxes payable 66,180 54,590
---------- ----------
TOTAL LIABILITIES 245,863 302,299
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock 4 250,968 250,968
Employee share options 18,000 17,000
Retained earnings 1,648,779 1,347,893
Unrealized holding loss on available-for-sale securities (293,458) -
Foreign exchange adjustment (161,265) (127,807)
--------- ----------
1,463,024 1,488,054
Less treasury stock at cost 5 (126,776) (112,332)
---------- ----------
1,336,248 1,375,722
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,582,111 $1,678,021
========== ==========
</TABLE>
ON BEHALF OF THE BOARD:
______________________________Director ___________________________Director
See accompanying notes
25
<PAGE>
ALPHA BYTES, INC.
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED JANUARY 31, 1999
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Note 1999 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Sales $1,602,107 $1,761,402 $1,373,697
Investment Income 42,714 17,731 58,571
---------- ---------- ----------
1,644,821 1,779,133 1,432,268
---------- ---------- ----------
EXPENSES
Research and development 6 364,363 237,342 131,131
Wages, management and consulting fees 216,898 181,760 257,275
General and administrative 154,670 155,842 273,998
Travel and promotion 141,440 144,013 95,862
Professional fees 104,199 230,900 52,437
Amortization 28,851 21,205 21,043
Interest 3,787 2,352 5,438
---------- ---------- ----------
1,014,208 973,414 837,184
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 630,613 805,719 595,084
---------- ---------- ----------
Provision for Income taxes:
Current 318,137 293,121 206,400
Deferred 11,590 11,830 46,400
---------- ---------- ----------
329,727 304,951 252,800
---------- ---------- ----------
NET EARNINGS $ 300,886 $ 500,768 $ 342,284
========== ========== ==========
EARNINGS PER SHARE 7 $ 0.040 $ 0.067 $ 0.045
========== ========== ==========
</TABLE>
See accompanying notes
26
<PAGE>
ALPHA BYTES, INC.
ALPHA BYTES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(Expressed in U.S. Dollars)
Capital Stock Options Treasury Stock
-------------------- ----------------- --------------------
Number Number Number Unrealized
of of of Retained Gain on
Shares Amount Shares Amount Shares Amount Earnings Investment
--------- -------- ------- ------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS AT JANUARY 31,
1996 7,135,002 $225,748 5,250 $ - - $ - $ 529,841 $ -
Net earnings for 1997 - - - - - - 342,284 -
Foreign exchange
adjustment for 1997 - - - - - - - -
Unrealized holding gain on
restricted marketable
securities - - - - - - - 343,267
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 - - 872,125 343,267
Net earnings for 1998 - - - - - - 500,768 -
Foreign exchange
adjustment for 1998 - - - - - - - -
Unrealized holding gain on
restricted marketable
securities - - - - - - - (343,267)
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 - - - - - - (25,000) -
--------- -------- ------- ------- ------- --------- ---------- ----------
BALANCE AS AT JANUARY 31,
1998 7,468,002 250,968 264,000 17,000 145,000 (112,332) 1,347,893 -
Net earnings for 1999 - - - - - - 300,886 -
Unrealized loss on
available-for-sale
securities - - - - - - - -
Foreign exchange
adjustment for 1999 - - - - - - - -
Employee share options
issued as compensation for
services received - net - - 100,000 1,000 - - - -
Purchase of stock on open
market - - - - - 27,500 (14,444) -
--------- -------- ------- ------- ------- --------- ---------- ----------
BALANCE AS AT JANUARY 31,
1999 7,468,002 $250,968 364,000 $18,000 172,500 $(126,776) $1,648,779 $ -
========= ======== ======= ======= ======= ========= ========== ==========
<CAPTION>
Unrealized
Holding
Loss On
Available- Foreign
For-Sale Exchange
Securities Adjustments TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
BALANCE AS AT JANUARY 31,
1996 $ - $ (76,050) $ 679,539
Net earnings for 1997 - - 342,284
Foreign exchange
adjustment for 1997 - 11,632 11,632
Unrealized holding gain on
restricted marketable
securities - - 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 - (64,418) 1,412,442
Net earnings for 1998 - - 500,768
Foreign exchange
adjustment for 1998 - (63,389) (63,389)
Unrealized holding gain on
restricted marketable
securities - - (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)
---------- --------- ----------
BALANCE AS AT JANUARY 31,
1998 - (127,807) 1,375,722
Net earnings for 1999 - - 300,886
Unrealized loss on
available-for-sale
securities (293,458) - (293,458)
Foreign exchange
adjustment for 1999 - (33,458) (33,458)
Employee share options
issued as compensation for
services received - net - - 1,000
Purchase of stock on open
market - - (14,444)
---------- --------- ----------
BALANCE AS AT JANUARY 31,
1999 $(293,458) $(161,265) $1,336,248
========== ========= ==========
</TABLE>
See accompanying notes
27
<PAGE>
ALPHA BYTES, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
YEAR ENDED JANUARY 31, 1999
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
CASH WAS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net earnings $ 300,886 $ 500,768 $ 342,284
Amortization 28,851 21,205 21,043
Deferred Income taxes 11,590 11,830 46,400
---------- --------- ---------
341,327 533,803 409,727
---------- --------- ---------
CHANGES IN NON-CASH WORKING CAPITAL ITEMS:
Accounts receivable 449,150 (587,162) 345,035
Prepaid expenses and sundry assets (7,964) 4,153 34,281
Accounts payable and accrued liabilities (47,306) (91,262) (17,033)
Income taxes payable (20,720) 186,969 105,796
Unearned revenue - (24,707) 8,501
---------- --------- ---------
373,160 (512,009) 476,580
---------- --------- ---------
714,487 21,794 886,307
---------- --------- ---------
FINANCING ACTIVITIES
Issue of shares - 5,500 19,720
Issue of employee share options 1,000 1,000 16,000
Purchase of stock for treasury (14,444) (112,332) -
Foreign exchange adjustment (33,458) (63,389) 11,632
Dividend paid - (25,000) -
Loan payable to directors - - (88,507)
Vehicle loan - - (2,206)
Loan payable - - (100,000)
---------- --------- ---------
(46,902) (194,221) (143,361)
---------- --------- ---------
INVESTING ACTIVITIES
Unrealized holding loss on available-for-sale securities (293,458) - -
Long term accounts receivable and work in process - 352,334 (270,000)
Net purchase of capital assets (52,410) (29,884) (38,171)
Sundry investments - net - - 13,422
Marketable securities - restricted - 161,026 -
---------- --------- ---------
(345,868) 483,476 (294,749)
---------- --------- ---------
INCREASE IN CASH AND AVAILABLE-FOR-SALE
SECURITIES 321,717 311,049 448,197
Cash and available-for-sale securities at the beginning of the year 921,191 610,142 161,945
---------- --------- ---------
CASH AND AVAILABLE-FOR-SALE SECURITIES
AT THE END OF THE YEAR $1,242,908 $ 921,191 $ 610,142
========== ========= =========
</TABLE>
See accompanying notes
28
<PAGE>
ALPHA BYTES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1999
(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,
1999, were as follows:
Alphabytes Computer Corporation (Canada) - ("Alphabytes Canada")
Alpha Bytes Computer Corporation (U.S.A.) - ("Alpha Bytes U.S.")
(B) CAPITAL ASSETS
Capital assets are stated at cost less accumulated amortization.
Amortization is calculated at the following annual rates:
Furniture and equipment - 20% declining balance
Vehicles - 30% declining balance
Computer hardware - 30% declining balance
Computer software - 100% declining balance
(C) FOREIGN CURRENCY
The financial statements are expressed in U.S. dollars.
Current assets and liabilities denominated in Canadian dollars at 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.
Exchange gains and losses resulting from the consolidation of the
Canadian subsidiary are reflected as an adjustment to stockholders'
equity.
(D) INVESTMENT TAX CREDITS
Investment tax credits are accounted for as a reduction of research
and development costs in the year the credits become available,
provided there is reasonable assurance that they will be realized.
29
<PAGE>
ALPHA BYTES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1999
(Expressed in U.S. Dollars)
2. AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Cost $1,252,644 $759,214
Less unrealized holding loss 293,458 9,775
---------- --------
$ 959,186 $749,439
========== ========
</TABLE>
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
Accumulated Balance
Cost Amortization 1999 1998
--------- ------------ -------- --------
<S> <C> <C> <C> <C>
Furniture and equipment $ 59,372 $ 36,922 $22,450 $28,121
Vehicles 38,315 34,835 3,480 4,971
Computer hardware 109,875 43,355 66,520 38,887
Computer software 19,978 16,890 3,088 -
-------- -------- ------- -------
$227,540 $132,002 $95,538 $71,979
======== ======== ======= =======
</TABLE>
4. CAPITAL STOCK
The company is authorized to issue 30,000,000 common shares.
The company issued 55,000 shares during 1998 and 278,000 shares during 1997
as compensation for services rendered to the company. The value assigned to
these shares was $5,500 and $19,720 respectively.
The company has granted outstanding options to purchase shares as follows:
<TABLE>
<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 expiring October 31, 2002
100,000 employee share options with an exercise price of $0.01 per share expiring October 31, 2003
</TABLE>
30
<PAGE>
ALPHA BYTES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1999
(Expressed in U.S. Dollars)
5. SHARES HELD IN TREASURY
During the prior 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 1999, the company purchased 27,500 common shares for treasury at a
cost of $14,444.
6. RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cost $ 465,028 $ 339,785
Less investment tax credits (100,665) (102,443)
--------- ---------
$ 364,363 $ 237,342
========= =========
</TABLE>
During the year, the company hired three additional software specialists
and an Internet specialist and commenced the initial development of its new
"H-Net" product. The initial phases were completed and development will
continue in the ensuing fiscal year.
7. EARNINGS PER SHARE
In February 1998, 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>
<S> <C>
Year ended January 31, 1999 - $7,468,002
1998 - 7,434,276
1997 - 7,183,647
</TABLE>
8. RELATED PARTY TRANSACTION
During the year, the company was charged $272,000 for management and
financial services of the president and secretary provided by a related
company.
31
<PAGE>
ALPHA BYTES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1999
(Expressed in U.S. Dollars)
9. COMMITMENTS
LEASES OF PREMISES
The company is committed under existing leases for premises to the
following minimum annual rents:
Year ending January 31, 2000 - $20,000
2001 - 22,000
2002 - 23,000
2003 - 4,000
10. CONTINGENCY
Alphabytes Computer Corporation ("Alphabytes Canada"), the Canadian
subsidiary of Alpha Bytes, Inc., is a party to a litigation against Gunter
Slaton, Sally Engle and Profitable Packaging Concepts Inc. ("PPC") stemming
from purported agreements relating to the operations of Systems By Design
Inc. ("SDI"), a company in the packaging business. In April 1997, an
arbitrator in New York issued an award in favor of Slaton, Engle and PPC,
against Alphabytes Canada, Anton Stephens, SDI and Peter Markus jointly and
severally. This award totals approximately $405,000, Including interest.
A motion to vacate the award of the arbitrator has been granted by the New
York Supreme Court in part, with reference by the Court to the arbitrator
to consider whether a previous undisclosed judgement held by Slaton against
Peter Markus, who was to have represented Alphabytes Canada and Stephens at
the original arbitration, prejudiced their defence in that proceeding. Mr.
Markus, purporting to be a New York attorney, failed to submit any
documents in the defence of the claim and failed to put forth any
counterclaim on behalf of Alphabytes Canada or Stephens even though there
was strong evidence available of losses sustained in this transaction which
had been brokered by Markus.
In the event the order is not vacated, according to Canadian Law any order
against a Canadian company will need to be re-heard in a Canadian Court
prior to enforcement. In the opinion of the management, the ultimate
disposition of these matters will have no material adverse effect on the
company's financial position, results of operation or liquidity.
11. COMPARATIVE FIGURES
Certain of the comparative figures have been restated to conform to the
presentation adopted in the current year.
12. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
Including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
32
<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 /s/ Anton Stephens
Anton Stephens, President and Director
(Principal Executive Officer)
Date: April 29, 1999
By /s/ Christine Stephens
Christine Stephens
Secretary and Director
Date: April 29, 1999
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 /s/ Anton Stephens
Anton Stephens, President and Director
(Principal Executive Officer)
Date: April 29,1999
By /s/ Christine Stephens
Christine Stephens
Secretary and Director
Date: April 29,1999
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 283,722
<SECURITIES> 959,186
<RECEIVABLES> 217,084
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,486,573
<PP&E> 227,540
<DEPRECIATION> 132,002
<TOTAL-ASSETS> 1,562,111
<CURRENT-LIABILITIES> 245,863
<BONDS> 0
0
0
<COMMON> 250,968
<OTHER-SE> 1,085,280
<TOTAL-LIABILITY-AND-EQUITY> 1,582,111
<SALES> 1,602,107
<TOTAL-REVENUES> 1,644,821
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,014,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,787
<INCOME-PRETAX> 630,013
<INCOME-TAX> 329,727
<INCOME-CONTINUING> 300,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300,886
<EPS-PRIMARY> 0.040
<EPS-DILUTED> 0.040
</TABLE>
