UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended April 30, 1997
Commission file Number 0-15066
Vertex Industries, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-2050350
(State of Incorporation) (I.R.S. Employer Identification No.)
23 Carol Street Clifton, New Jersey 07014
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (201) 777-3500
Indicated 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) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
Common stock, par value $.005 per share: 5,110,107 shares outstanding as of
June 16, 1997.
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VERTEX INDUSTRIES, INC. AND SUBSIDIARY
FORM 10-Q
April 30, 1997
I N D E X
PAGE
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
April 30, 1997 and July 31, 1996 . . . . . . . . . . 3
Consolidated Statements of Operations
three and nine months ended April 30, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . .5
Consolidated Statements of Changes in
Stockholders' Equity - for the year ended
July 31, 1996 and nine months ended
April 30, 1997. . . . . . . . . . . . . . . . . . . .6
Consolidated Statements of
Cash Flows - nine months
ended April 30, 1997 and 1996 . . . . . . . . . . . .7
Notes to Consolidated Financial Statements. . . . . .8
Item 2. Management's Discussion and Analysis
of Consolidated Financial Condition and
Results of Operations . . . . . . . . . . . . . . . .10
Part II - Other Information
Item 6. Exhibits and Reports on form 8 - K . . . . .14
Signatures. . . . . . . . . . . . . . . . . . . . . .15
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<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
April 30, 1997 July 31, 1996
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 640,202 $ 394,344
Accounts Receivable, Less Allowance
for Doubtful Accounts of
$75,985 at April 30, 1997 and
July 31, 1996 536,406 608,164
Notes and other receivables 177,291 170,755
Inventories 656,409 693,179
Prepaid Expenses and
other current assets 63,635 13,885
----------- ---------
Total Current Assets 2,073,943 1,880,327
----------- ---------
PROPERTY, EQUIPMENT,
AND CAPITAL LEASES:
Property and Equipment 1,743,258 1,725,502
Capital Leases 141,757 141,757
---------- ---------
Total Property, Equipment and
Capital Leases 1,885,015 1,867,259
Less: Accumulated Depreciation and
Amortization (1,501,528) (1,393,102)
----------- ---------
Net Property, Equipment
and Capital Leases 383,487 474,157
----------- ---------
OTHER ASSETS:
Cost in Excess of Net Assets
of Companies Acquired, Net of
accumulated amortization of
$338,051 at April 30, 1997 and
$301,016 at July 31, 1996 75,837 112,872
Deferred tax asset 188,500 195,000
Other Assets 52,958 53,500
---------- ----------
Total Other Assets 317,295 361,372
---------- ----------
Total Assets $2,774,725 $2,715,856
========== ==========
<FN>
The accompanying notes to consolidated financial statements are an integral part of
these balance sheets.
</TABLE>
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
April 30, 1997 July 31, 1996
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Long-Term debt, current portion $ 2,800 $ 2,800
Current portion of obligations
under capital leases 20,030 32,849
Accounts payable 126,731 169,632
Accrued Expenses and Other Liabilities 128,679 99,237
Customer Deposits/Unearned Revenue 173,579 86,120
------- -------
Total Current Liabilities 451,819 390,638
------- -------
LONG-TERM LIABILITIES:
Long-Term Debt, Less Current Portion 467 2,567
Obligations Under Capital Leases,
Net of Current Portion 18,008 30,308
------- ------
Total Long-Term Liabilities 18,475 32,875
------- ------
EXCESS OF NET ASSETS OF ACQUIRED COMPANIES OVER COST
NET OF ACCUMULATED AMORTIZATION of $486,131 at
April 30, 1997 and $479,165 at July 31, 1996 -- 6,966
------- ------
COMMITMENTS AND CONTINGENCIES -- --
------- ------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share 2,000,000
shares authorized; none issued and outstanding -- --
Common Stock, par value $.005
per share, authorized 20,000,000 shares; issued
5,122,979 shares at April 30, 1997 and 5,108,979
shares at July 31, 1996, respectively 25,615 25,545
Capital in Excess of Par Value 5,191,538 5,182,188
Accumulated Deficit (2,862,153) (2,871,787)
---------- ---------
2,355,000 2,335,946
Less: Treasury stock, 12,872
shares at cost (50,569) (50,569)
---------- ---------
Total Stockholders' Equity 2,304,431 2,285,377
---------- ---------
Total Liabilities and
Stockholders' Equity $2,774,725 $2,715,856
========== ==========
<FN>
The accompanying notes to consolidated financial statements are an integral part of
these balance sheets.
</TABLE>
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended April 30 Nine Months Ended April 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
OPERATING REVENUE $ 681,622 $ 859,424 $2,623,665 $2,729,821
COST OF SALES 367,335 411,024 1,269,788 1,289,583
----------- --------- ---------- ----------
GROSS PROFIT 314,287 448,400 1,353,877 1,440,238
----------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling and Administrative 355,466 327,104 1,005,501 931,579
Research and Development 135,173 86,652 354,457 281,286
Total Operating Expenses ----------- ---------- ---------- ---------
490,639 413,756 1,359,958 1,212,865
----------- ---------- ---------- ---------
OPERATING INCOME (LOSS) (176,352) 34,644 (6,081) 227,373
----------- ---------- ---------- ---------
OTHER INCOME NET 8,167 1,311 22,215 3,042
----------- ---------- ---------- ---------
Income (Loss) before income
taxes (168,185) 35,955 16,134 230,415
------------ ---------- ---------- ---------
INCOME TAX/PROVISION (Benefit) (67.200) 14,879 6,500 93,229
------------ ---------- ---------- ---------
Net Income (Loss) $ (100,985) $21,076 $9,634 $ 137,186
============= ========== ========== ==========
Income (Loss) per share of
Common Stock $ (.02) $ -- $ -- $ .03
============= ========== ========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING: 5,253,509 5,094,507 5,250,035 5,086,091
<FN>
The accompanying notes to consolidated financial statements are an integral part of
these financial statements.
</TABLE>
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Common Stock Capital
$.005 Par Value in Excess Accumulated Treasury
Year ended July 31, 1996 Shares Amount Par Value Deficit Stock Total
- ------------------------ -------- ------ --------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 5,080,979 $25,404 $5,167,951 $(3,109,535) $(50,569) $2,033,251
Exercise of Stock Options 28,100 141 14,237 -- -- 14,378
Net income for the year
ended July 31, 1996 -- -- -- 237,748 -- 237,748
---------- --------- ---------- ------------- ---------- --------
Balance at July 31, 1996 5,108,979 $ 25,545 $5,182,188 $(2,871,787) $(50,569) $2,285,377
========= ========= ========== ============ ========== ==========
Nine months ended
April 30, 1997
Exercise of Stock Options 14,000 70 9,350 -- -- 9,420
Net Income for the nine
months ended April 30, 1997 -- -- -- 9,634 -- 9,634
-------- --------- ----------- ----------- ---------- ----------
Balance at April 30, 1997 5,112,979 $25,615 $5,191,538 $(2,862,153) $(50,569) $2,304,431
========= ========== ========== ============ ========== ==========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
</TABLE>
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
April 30,1997 April 30,1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 9,634 $ 137,186
------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 138,495 104,826
Deferred taxes 6,500 91,406
(Increase) or Decrease in operating assets:
Accounts receivable 71,758 (59,255)
Inventories 36,770 139,879
Notes and other receivables (6,536) --
Prepaid expenses and other current assets (49,750) (7,348)
Increase or (decrease) in operating liabilities:
Accounts payable (42,901) (23,105)
Customer Deposits 87,459 (126,920)
Accrued expenses and other liabilities 29,442 (5,947)
------------- -------------
Net adjustments to reconcile net income to
net cash provided by operating activities 271,237 128,332
------------- -------------
Net Cash provided by operating activities 280,871 265,418
------------- -------------
Cash Flows from Investing Activities:
Additions to property and equipment (17,756) (54,886)
Decrease in other assets 542 202
------------- ------------
Net cash used for investing activities (17,214) (54,684)
------------- ------------
Cash Flows from Financing Activities:
Payment of long term debt (2,100) (2,100)
Payment of capitalized lease obligations (25,119) (19,837)
Proceeds from issuance of common stock 9,420 12,978
------------- ------------
Net Cash used for financing activities (17,799) (8,959)
------------- ------------
Net Increase in Cash 245,858 201,775
Cash and Cash Equivalents at Beginning of Period 394,344 321,881
------------- ------------
Cash and Cash Equivalents at End of Period $ 640,202 $ 523,656
============= ============
<FN>
The accompanying notes to the consolidated financial statements are an
integral part of these financial statements.
</TABLE>
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VERTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q, and therefore, do
not include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Reference should be made to the
annual financial statements including the footnotes thereto, included in the
Vertex Industries, Inc. and subsidiary (the "Company") Annual Report on Form
10-K for the year ended July 31, 1996. In the opinion of management, the
accompanying unaudited interim financial statements contain all material
adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial condition, the results of operations and cash flows of
the Company and its consolidated subsidiary for the interim periods.
Operating results for interim periods are not necessarily indicative of
the results that may be expected for the entire year.
2. Income Taxes
At July 31, 1996, the Company had net operating loss ("NOLs") carryforwards
available to offset future taxable income of approximately $3.8 million and
$3.4 million for federal and state tax purposes, respectively. Realization
of the future tax benefits associated with the NOLs is dependent on the
Company's ability to generate taxable income within the carryforward period
and the periods in which net temporary differences reverse. Future levels
of operating income and taxable income are dependent upon general economic
conditions, competitive pressures on sales and margins and other factors
beyond the Company's control. Accordingly, no assurance can be given that
sufficient taxable income will be generated for utilization of all of the
NOLs and reversals of temporary differences.
As of April 30, 1997 the Company had a deferred tax asset valuation
allowance of approximately $1.5 million with a net deferred tax asset of
approximately $188,500 which was recorded in prior years relating to the
realization of the NOLs. As of April 30, 1997 the Company has not adjusted
the deferred tax asset valuation allowance.
In assessing the realizability of the $188,500 net deferred tax asset, the
Company has considered numerous factors, including its future operating plans
and its past history of operating losses. Management believes that the
$188,500 net deferred tax asset represents a reasonable estimate of the
future utilization of the NOLs and the Company will continue to evaluate the
likelihood of future profits and the necessity of future adjustments to the
deferred tax asset valuation allowance.
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3. Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation", which is effective in
the Company's 1997 fiscal year. The statement encourages entities to adopt the
fair value-based method of accounting for employee stock options, as opposed to
the method which measures compensation cost for those plans using the intrinsic
value-based accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". The Company has decided not to adopt the recognition
provisions of SFAS No. 123. However, the disclosure requirements of SFAS No.
123 will be adopted for fiscal year end 1997.
4. License Agreement with NetWeave Corporation
On February 17, 1997 the Company entered into a license agreement with NetWeave
Corporation to develop, market, sell and support the NetWeave product
worldwide. Vertex Industries will pay NetWeave a royalty on the initial
licenses sold and on annual license fees paid by the customer for maintenance
and support of the NetWeave product.
Under terms of the agreement, the NetWeave Corporation assigns its existing
customer base to Vertex Industries along with the existing sales
representative agreements in the U.S. and the master distributor with SX
Consultancy for Europe and Asia. SX Consultancy is a European software
distributor and developer of custom software based in the UK with ties to
distributors in Asia. Vertex will maintain the current NetWeave Corporation
facility in Philadelphia along with existing employees. The Licensing
Agreement replaces the Conditional Acquisition Agreement which the Company
announced in May, 1996. The Sombers Group, Inc. custom software portion of
the original agreement remains part of The NetWeave Corporation.
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<PAGE>
ITEM 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Results of Operations
Three months ended April 30, 1997 compared with three months ended April 30,
1996.
Overview
The Company experienced a 21% decrease in operating revenues and recorded a
net loss of $100,985 for the quarter ended April 30, 1997, compared to net
income of $21,076 for the same period in 1996. The decrease in operating
revenues is primarily attributed to a decrease in demand for the label
generating systems (LGS) product line in the amount of $273,000 for the
quarter ended April 30,1997 as compared to the same period in 1996. The
NetWeave licensing agreement contributed approximately $50,000 in operating
revenues for the quarter ended April 30, 1997. A major portion of the NetWeave
licensing agreement revenue is in annual license fees (ALFs). Because of the
annual nature of these contracts, the revenue from each is recorded as one
twelfth of the total each month rather than the entire amount of the contract
at signing. ALFs are prepaid, so the Company receives cash flow but amortizes
the revenue over the life of the license or twelve months. In addition,
in order to support the customer base which the Company received as part of
the agreement, the Company is supporting those annual license contracts which
were already in effect as of the date of the license agreement. This amounts
to providing approximately six months, on the average, of annual license
support with no accompanying cash flow or revenue. This could be viewed as
one of the costs associated with of the licensing agreement. The decrease in
net income is due to a decrease in operating revenues in addition to a decrease
in gross profit margin and an increase in operating expenses due to the license
agreement with NetWeave.
Net Income (Loss)
Net income decreased $122,061 to a net loss of $100,985 for the quarter
ended April 30, 1997 as compared to net income of $21,076 for the same period
in 1996. The decrease in net income to a net loss is primarily due to a
decrease in operating revenue of approximately 21% to $681,622 for the quarter
ended April 30, 1997 as compared to $859,424 for the same period in 1996.
The decrease is also attributed to an increase in operating expenses of
approximately $76,883 or 19% in 1997 as compared to the same period in 1996.
Operating Revenues
Operating revenues decreased $177,802 or 21% to $681,622 for the quarter
ended April 30, 1997, compared to $859,424 for the same period in 1996. The
decrease in operating revenues is primarily attributed to an decrease in demand
for the LGS product line of approximately $273,000. The NetWeave licensing
agreement generated approximately $50,000 in operating revenues for the quarter
ended April 30, 1997.
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Cost of Sales
Cost of Sales increased to 54% of revenues in the third quarter of 1997
compared to 48% for the same period in 1996. The increase is primarily due
to a change in the sales mix in which sales of lower margin products increased
whereas sales of higher margin products decreased.
Operating Expenses
Operating expenses increased $76,883 or 19% to $490,639 for the quarter
ended April 30, 1997, as compared to $413,756 for the same period in 1996.
The increase is primarily due to the NetWeave licensing agreement which had
operating expenses of approximately $79,000 for the quarter ended April 30,
1997.
On February 17, 1997 the Company commenced operating the Pennsylvania office
of NetWeave Corporation. The components of the increase in operating expenses
are an increase of $28,362 or 9% in selling and administrative expenses and
an increase of $48,521 or 56% in research and development expenses for the
quarter ended April 30, 1997 as compared to 1996. The Company continues to
expand its research and development efforts on its BridgeNet Software product
line.
Net Other Income
Net other income increased $6,856 to $8,167 for the quarter ended April 30,
1997 compared to $1,311 for the same period in 1996. The increase is due to
an increase in interest income on the Company's money market account.
Provision for Income Taxes
The Company recorded an income tax benefit of $67,200 for the quarter ended
April 30, 1997 as compared to an income tax provision of $14,879 for the same
period in 1996. The income tax benefit of $67,200 was offset against the
Company's deferred tax asset at April 30, 1997.
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<PAGE>
Nine months ended April 30, 1997 compared with nine months ended April 30,
1996.
Overview
The Company's operating revenues decreased approximately 4% and net income
decreased to $9,634 for the nine months ended April 30, 1997 as compared to
net income of $137,186 for the same period in 1996. The decrease in operating
revenues is primarily due to a decrease in demand for the bar code and
software product lines of approximately $310,000. The NetWeave licensing
agreement had operating revenues of approximately $50,000 from February 17,
1997 through April 30, 1997. A major portion of the NetWeave Business Unit
revenue is in annual license fees (ALFs). Because of the annual nature of
these contracts, the revenue from each is recorded as one twelfth of the
total each month rather than the entire amount of the contract at signing.
ALFs are prepaid, so the Company receives cash flow but amortizes the revenue
over the life of the license or twelve months. In addition, in order to
support the customer base which the Company received as part of the agreement,
the Company is supporting those annual license contracts which were already in
effect as of the date of the license agreement. This amounts to providing
approximately six months, on the average, of annual license support with no
accompanying cash flow or revenue. This could be viewed as one of the costs
of the license agreement. The decrease in net income is attributed to a
decrease in operating revenues and an increase in operating expenses.
Net Income
Net Income decreased $127,552 to $9,634 for the nine months ended April 30,
1997, compared to net income of $137,186 for the same period in 1996. The
decrease in net income is attributed to a decrease in the operating revenues
of 4%. The decrease is also due to an increase in operating expenses of
$147,093 or 12% for the nine months ended April 30, 1997 compared to the
same period in 1996.
Operating Revenues
Operating revenues decreased 4% to $2,623,665 for the nine months ended April
30, 1997 compared to $2,729,821 in the same period last year. The decrease is
due to a decrease in demand of approximately $374,251 in the card devices,
bar code, software and LGS product lines coupled with an increase in the
weighing product line of $218,000. The NetWeave licensing agreement generated
operating revenues of approximately $50,000 from February 17, 1997 through
April 30, 1997.
Cost of Sales
Cost of Sales increased to 48% of revenues for the nine months ended April
30, 1997, compared to 47% for the same period in 1996. The slight increase
is due to a shift in the sales mix from the higher margin products to the
lower margin products.
Operating Expenses
Operating expenses increased 12% or $147,093 to $1,359,958 for the nine
months ended April 30, 1997 compared to $1,212,865 for the same period in
1996. The increase is comprised of an increase of $73,922 or 8% in selling
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and administrative expenses which is due to $55,000 of selling and adminis-
trative expenses from the NetWeave Business Unit and an increase in advertising
expenses of approximately $19,000. Research and development expenses
increased $73,171 or 26% for the nine months ended April 30, 1997 as compared
to the same period in 1996. The NetWeave licensing agreement had $24,173 in
research and development expenses in addition to an increase in the Company's
research and development on its BridgeNet software products.
Net Other Income
Net other income increased $19,173 to $22,215 for the nine months ended
April 30, 1997, compared to net other income of $3,042 for the same period
in 1996. The increase is primarily due to the interest income received on
the Company's money market account.
Provision for Income Taxes
The Company recorded an income tax provision of $6,500 for the nine months
ended April 30, 1997 as compared to $93,229 for the same period in 1996. See
footnote two on page 8 for additional information on income taxes.
Liquidity and Capital Resources
At April 30, 1997 the Company had $640,202 in cash compared to $394,344 at
July 31, 1996. Working Capital and the current ratio were $1,622,124 and
4.42 to 1 at April 30, 1997 versus $1,489,689 and 4.81 to 1 at July 31, 1996.
Net cash provided by operating activities was $280,871 for the first nine
months of 1997.
Capital expenditures were approximately $17,756 and $54,886 for the nine
month periods ended April 30, 1997 and 1996, respectively.
As previously mentioned on February 17, 1997 the Company entered into a
license agreement with NetWeave Corporation. The Company intends on using
working capital and the working capital line of credit to generate sales in
both the NetWeave and BridgeNet product lines.
The Company received a $300,000 discretionary working capital line
of credit from a financial institution. The line of credit bears an interest
rate of prime plus 1% and expires in January, 1998. The Company has not
borrowed against this line of credit as of April 30, 1997.
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Vertex Industries, Inc. and Subsidiary
Part II - Other Information
Item 6. Exhibits and Reports on Form 8 - K
(a) None
(b) There have been no reports filed
on form 8 - K for the quarter ended
April 30, 1997
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<PAGE>
SIGNATURES
Pursuant to the requirements 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.
VERTEX INDUSTRIES, INC.
Registrant
By S/ Robert T. McLaughlin
Robert T. McLaughlin
Chief Financial Officer, Treasurer
(on behalf of the Registrant and as
principal financial officer)
June 16, 1997
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> APR-30-1997
<CASH> 640,202
<SECURITIES> 0
<RECEIVABLES> 789,682
<ALLOWANCES> 75,985
<INVENTORY> 656,409
<CURRENT-ASSETS> 2,073,943
<PP&E> 1,885,015
<DEPRECIATION> 1,501,528
<TOTAL-ASSETS> 2,774,725
<CURRENT-LIABILITIES> 451,819
<BONDS> 3,267
0
0
<COMMON> 25,615
<OTHER-SE> 2,278,816
<TOTAL-LIABILITY-AND-EQUITY> 2,774,725
<SALES> 2,623,665
<TOTAL-REVENUES> 2,623,665
<CGS> 1,269,788
<TOTAL-COSTS> 1,269,788
<OTHER-EXPENSES> 1,359,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,178
<INCOME-PRETAX> 16,134
<INCOME-TAX> 6,500
<INCOME-CONTINUING> 9,634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,634
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>