[DATARAM LOGO] DATARAM CORPORATION 2004 ANNUAL REPORT Table of Contents 1 Message from the President 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Financial Review 20 Selected Financial Data [PICTURE OF ROBERT TARANTINO] To Our Shareholders Fiscal 2004 was a year of recovery and a return to growth for the Company. We began the year with a hard earned return to profitability, primarily as a result of cost reductions initiated at the end of last fiscal year. Our objective was to align our cost structure to the economic realities of the information technology marketplace while preserving our key resources to focus on future growth. Signs of market improvement surfaced in our second quarter when we had an order rate that was significantly in excess of our shipments. We continued to have a positive book-to-bill ratio throughout the remainder of the fiscal year. The result of this was renewed earnings growth in the second half of our fiscal year. 2004 Financial Highlights Revenues in fiscal 2004 grew 16% to $62 million. We returned to profitability, earning $2.3 million We generated positive cash flow from operating activities this fiscal year of $4.3 million. We strengthened our balance sheet and working capital position. Working capital at the end of fiscal 2004 amounted to $13.5 million, including cash and cash equivalents of $6.8 million. Our current ratio at year-end was 3.5 to 1 and we are debt free. The Year Ahead The Company has historically derived the greater part of its revenue from the sale of its compatible memory products. Our product offering includes memory for enterprise servers and workstations produced by major manufacturers: HP, IBM, SGI, Sun Microsystems, Dell, Intel and AMD Opteron systems. Our design capabilities have kept the Company in the forefront of memory upgrades and enabled us to increase our presence within the server memory marketplace. While our ability to grow revenue through the sales of compatible memory was encouraging, our real success came as a result of significant growth in our OEM business. Specifically, we worked diligently to further develop our OEM business leveraging our product design expertise, manufacturing expertise and our rapid prototyping capabilities. We capitalized on our relationships with the major DRAM suppliers to promote the routing of their smaller projects to Dataram, where these projects could be more efficiently and cost effectively handled for the customer. These initiatives proved successful as our OEM business grew to approximately 50% of our total business by the fourth quarter. Our strategy is continuing to prove successful, as we have just recently received our first order for a program from a major computer manufacturer, who had not previously been a Dataram OEM customer. We enter our new fiscal year profitable and with a stronger balance sheet. In fiscal 2005, we expect continued growth from our compatible memory products line, but the rate of that growth will be very much dependant on the macro economic environment for the information technology industry. The prospects for our OEM business are good. While the sales and qualification cycles are long, we are confidant that with the our design and manufacturing expertise combined with our industry relationships, we will continue to be successful in securing projects with major computer and embedded systems manufacturers. On behalf of the Company's Board of Directors and management team, I would like to thank our shareholders for their continued support and our employees for their hard work and dedication. As many of our investors are aware, our management is comprised of many long-term and experienced professionals who have developed considerable personal equity interests in the Company and who are dedicated to building shareholder value. We look forward to continued profitable growth in fiscal 2005. July 16, 2004 ROBERT V. TARANTINO Robert V. Tarantino Chairman of the Board of Directors, President and Chief Executive Officer Page 1 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Dataram is a developer, manufacturer and marketer of large capacity memory products primarily used in high performance network servers and workstations. The Company provides customized memory solutions for original equipment manufacturers (OEMs) and compatible memory for leading brands including Dell, HP (including COMPAQ), IBM, Silicon Graphics and Sun Microsystems. The Company also manufactures a line of memory products for Intel motherboard based servers for sale to OEMs and channel assemblers. The Company's memory products are sold worldwide to original equipment manufacturers, distributors, value-added resellers and end users. The Company has a manufacturing facility in the United States with sales offices in the United States, Europe and Japan. The Company is an independent memory manufacturer specializing in high capacity memory and competes with several other large independent memory manufacturers as well as the original equipment manufacturers mentioned above. The primary raw material used in producing memory boards is dynamic random access memory (DRAM) chips. The purchase cost of DRAM chips typically represents approximately 75% of the total cost of a finished memory board. Consequently, average selling prices for computer memory boards are significantly dependent on the pricing and availability of DRAM chips. Results of Operations The following table sets forth consolidated operating data expressed as a percentage of revenues for the periods indicated. Years Ended April 30, 2004 2003 2002 _________________________________________________________________ Revenues 100.0% 100.0% 100.0% Cost of sales 74.7 73.9 69.9 _____ _____ _____ Gross profit 25.3 26.1 30.1 Engineering and development 2.1 2.9 2.3 Selling, general and administrative 19.3 32.1 26.5 Restructuring charges - 7.1 1.5 Asset impairment charge - 21.5 7.2 _____ _____ _____ Earnings (loss) from operations 3.9 (37.5) (7.4) Other income (expense), net 0.2 (0.2) (1.1) _____ _____ _____ Earnings (loss) before income tax expense (benefit) 4.1 (37.7) (8.5) Income tax expense (benefit) 0.4 (8.5) 1.4 _____ _____ _____ Net earnings (loss) 3.7 (29.2) (9.9) ===== ===== ===== Fiscal 2004 Compared With Fiscal 2003 At the end of fiscal 2003, the Company exited the market for desktop, notebook and flash memory (PC memory) and closed its manufacturing facility in Aarhus, Denmark. In fiscal 2004, the Company's revenues were derived solely from sales of compatible memory for high performance servers and workstations and from sales of customized memory for OEMs. Revenues for fiscal 2004 were $62.0 million compared to $53.5 million in fiscal 2003. The growth in revenue came primarily from sales to OEMs, which accounted for approximately 36% of revenue in fiscal 2004, compared to approximately 16% in fiscal 2003. Revenues from the sale of memory for the compatibles market grew by approximately 5% to approximately $39.7 million in fiscal 2004 from fiscal 2003. Overall volume as measured by gigabytes shipped increased by approximately 25% in fiscal 2004 from fiscal 2003. Average selling price per gigabyte declined by approximately 8% in fiscal 2004 compared to the prior year. Revenues for the fiscal year's ended April 30, 2004 and 2003 by geographic region were: Year ended Year ended April 30, 2004 April 30, 2003 ________________ ________________ United States $ 43,780,000 $ 29,495,000 Europe 10,994,000 13,180,000 Other(principally Asia Pacific Region) 7,210,000 10,854,000 ________________ ________________ Consolidated $ 61,984,000 $ 53,529,000 ================ ================ Cost of sales was $46.3 million in fiscal 2004 or 74.7 percent of revenue compared to $39.5 million or 73.9 percent of revenue in fiscal 2003. Fiscal 2004 cost of sales included royalty expense of approximately $1,058,000, or 1.7% of revenue compared to $464,000, or 0.8% of revenue in fiscal 2003. The 2004 increase is attributable to a recent agreement entered into with a company that allowed the Company to use their patented technology through the date of the agreement. The Company no longer manufactures products using this technology. Fiscal 2005 royalty expense is expected to be approximately the same percentage of revenue as fiscal 2003. Management expects that cost of sales as a percentage of revenue will generally be approximately 75%, which is in line with its historical norm. Fluctuations either up or down of 3% or less in any given period are not unusual and can result from many factors, some of which are a rapid change in the price of DRAMs, a change in product mix possibly resulting from a large order or series of orders for a particular product or a change in customer mix. Engineering and development costs amounted to $1.3 million in fiscal 2004 compared to $1.5 million in fiscal 2003. The reduction in cost is primarily attributable to workforce reductions that occurred in fiscal 2003. The Company maintains its commitment to the timely introduction of new memory products. Selling, general and administrative costs were $12.0 million in fiscal 2004 versus $17.2 million in fiscal 2003. The decline in expense is primarily the result of savings in personnel costs as a result of restructurings that occurred in the first and fourth quarter of fiscal 2003. These restructurings resulted in workforce reductions of approximately 24% and 28%, respectively and were recorded as a separate expense totaling $3.8 million in fiscal 2003. Additionally, in Fiscal 2003, the Company recorded a separate asset impairment charge of approximately $11.5 million, primarily related to the write-off of its purchased goodwill, net of the effect of certain foreign exchange translation gains. Other income (expense), net for fiscal year 2004 totaled $119,000 versus ($84,000) in fiscal 2003. Fiscal 2004 income consisted primarily of $6,000 of net interest income, $47,000 of foreign currency transaction gains and $66,000 of gains on sale of certain assets. Fiscal 2003 other expense consisted of $84,000 of net interest expense. Page 2 Income tax expense (benefit) for fiscal 2004 was $252,000 versus ($4.6 million) in fiscal 2003. Fiscal 2004 expense represents a provision for state income tax expense only as the Company utilized a portion of its federal net operating loss (NOL) carry forwards to offset any federal tax due and therefore recorded no federal income tax expense. As of April 30, 2004, the Company has a NOL carry forward of approximately $14.4 million which can be used to offset future taxable income. Fiscal 2003 Compared With Fiscal 2002 In fiscal 2003, the Company continued to be adversely effected by the worldwide retrenchment in computer sales. Capital spending on new information technology equipment remained soft in light of the general economic uncertainty. In part, the Company was able to offset this trend by the sale of upgrades for existing equipment. The Company was also affected by the continuing worldwide decline in DRAM prices. DRAM costs represent approximately 75% of the cost of the Company's final product. Generally, competitive pressures require the Company to pass through these decreases to its customers. As a result of these factors, volume measured as gigabytes shipped declined by approximately 30% and average selling prices declined by approximately 7% from fiscal 2002 levels. Revenues in fiscal 2003 totaled $53.5 million, a decrease of 34% from fiscal 2002 revenues of $81.2 million, primarily as a result of the change in volume. Cost of sales decreased $17.2 million in fiscal 2003 to $39.5 million from fiscal 2002 cost of sales of $56.7 million. The decrease was mainly attributable to the decrease in volume. Cost of sales as a percentage of revenue increased by 4.0% in fiscal 2003 from fiscal 2002. The increase in percentage was primarily attributable to decreased utilization of production capacity resulting from the lower shipment levels. Engineering and development costs amounted to $1.5 million in fiscal 2003 compared to $1.8 million in fiscal 2002. The reduction in cost was primarily attributable to workforce reductions. Selling, general and administrative costs were $17.2 million in fiscal 2003 versus $21.5 million in fiscal 2002. The decline in expense was primarily the result of restructurings, which occurred, in fiscal 2002 and in the first quarter of fiscal 2003. These restructurings resulted in workforce reductions of approximately 25% and 24%, respectively. During the fourth quarter of fiscal 2003, the Company announced a restructuring of its operations. As part of this restructuring, the Company ceased production of memory for the PC market and closed its production facility in Aarhus, Denmark. The Company consolidated all manufacturing into its facility located in Bucks County, Pennsylvania. As a result, the Company reduced its workforce by approximately 28 percent and incurred a consolidated pretax charge of approximately $3.8 million in the fourth quarter, which consisted primarily of additional depreciation and amortization of fixed assets, a provision for leasehold impairment, a write down of PC related inventory and severance payments. Additionally, the Company wrote-off its purchased goodwill of approximately $11.1 million. Of these amounts, $300,000 was charged to cost of sales, with the balance recorded as restructuring charges of $3.1 million and asset impairment charges of $11.5 million, which was net of the effect of certain foreign exchange translation gains. The Company entered into lease termination agreements totaling approximately $1 million and had severance obligations totaling approximately $850,000. These obligations were paid in fiscal 2004. An additional restructuring charge was recorded in the first quarter of fiscal 2003, which totaled $740,000 and was primarily related to severance costs. The severance payments were paid in fiscal 2003. Fiscal 2002 restructuring charges were $1.2 million, also severance related. As of April 30, 2002, the Company had paid the majority of these costs, except for approximately $50,000, which was paid early in fiscal 2003. Other income (expense), net for fiscal year 2003 totaled ($84,000) of net interest expense versus ($916,000) of net interest expense in fiscal 2002. Fiscal 2002 interest income (expense), net consisted of $291,000 of interest income, offset by ($1,207,000) of interest expense. During fiscal 2002 the Company elected to prepay certain capital lease obligations, which resulted in an incremental interest charge of $141,000. The Company also terminated early its interest rate swap agreement in connection with the repayment of its term loan, which resulted in a one-time interest charge of $259,000. The balance of the decline in interest expense in fiscal 2003 from fiscal 2002 was attributable to reduced debt levels. Income tax expense (benefit) for fiscal 2003 was ($4.6 million) versus $1.2 million in fiscal 2002. Fiscal 2003 expected income tax benefit of approximately ($7.1 million) was reduced by a valuation reserve of approximately $2.5 million. The Company had a federal NOL carry back of approximately $9.2 million, which resulted in an income tax receivable of $3.1 million at April 30, 2003. Liquidity and Capital Resources The Company's cash and working capital position remains strong. Working capital at the end of fiscal 2004 amounted to $13.5 million, including cash and cash equivalents of $6.8 million, compared to working capital of $9.4 million, including cash and cash equivalents of $2.5 million in fiscal 2003. Current assets at year end were 3.5 times current liabilities compared to 2.5 at the end of fiscal 2003. Inventories at the end of fiscal 2004 were $2.5 million compared to fiscal 2003 year end inventories of $2.9 million. Inventory levels for both years are within a normal range relative to the Company's revenue levels. Capital expenditures, net of dispositions were $160,000 in fiscal 2004 compared to $673,000 in fiscal 2003. Capital expenditures in fiscal 2004 were unusually low. Fiscal 2005 capital expenditures are expected to be approximately at the same level as fiscal 2003 expenditures. At the end of fiscal 2004, contractual commitments for capital purchases were zero. On June 21, 2004, the Company entered into a credit facility with a bank, which provides for up to a $5 million revolving credit line. Advances under the facility are limited to 75% of eligible receivables, as defined in the agreement. The agreement provides for LIBOR rate loans and base rate loans at an interest rate no higher than the bank's base commercial lending rate. The Company is required to pay a commitment fee equal to 1/4 Page 3 of one percent per annum on the unused commitment. The agreement contains certain restrictive covenants, specifically a trailing twelve month profitability requirement, a current asset to current liabilities ratio, a total liabilities to tangible net worth ratio and certain other covenants, as defined in the agreement. The agreement limits the Company's open market stock repurchases to $1,000,000 per year without prior waiver and precludes the payment of cash dividends. Management believes that the Company's cash flows generated from operations will be sufficient to meet short term liquidity needs as the Company does not expect any unforeseen demands beyond general operating requirements for cash. Management further believes that its working capital together with internally generated funds from its operations and its bank line of credit are adequate to finance the Company's long term operating needs and future capital requirements. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2004 are as follows: Operating leases Year ending April 30: ________________ 2005 $ 531,000 2006 463,000 2007 48,000 2008 and thereafter 0 ________________ 1,042,000 ================ At April 30, 2004, the Company had open purchase orders outstanding totaling $6,217,000 primarily for inventory items to be delivered in the first quarter of fiscal 2005. These purchase orders are cancelable. Inflation has not had a significant impact on the Company's revenue and operations. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 was effective for the Company's fiscal year beginning May 1, 2003. The adoption of SFAS 143 had no impact on its operations and financial position. On April 22, 2003, the FASB determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of stock options. On March 31, 2004, the FASB issued an exposure draft, Share-Based Payment, an amendment of FASB Statements No. 123 and 95, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of those instruments were previously classified as equity. SFAS 150 requires an issuer to classify the following instruments as liabilities (or assets in some circumstances): mandatory redeemable financial instruments; obligations to repurchase the issuer's equity shares by transferring assets; and certain obligations to issue a variable number of its equity shares. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 was adopted by the Company in Fiscal 2004. The adoption had no material effect on its consolidated financial statements. Critical Accounting Policies In December 2001, the Securities and Exchange Commission ("SEC") published a Commission Statement in the form of Financial Reporting Release No. 60 which requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC has defined critical accounting policies as those that are both important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While the Company's significant accounting policies are summarized in Note 1 to the consolidated financial statements included in this Annual Report, it believes the following accounting policies to be critical: Revenue Recognition-Revenue is recognized upon shipment of goods to customers. The Company's revenue earning activities involve delivering or producing goods, and revenues are considered to be earned when the Company has completed the process by which it is entitled to such revenues. The following criteria are used for revenue recognition: persuasive evidence of an arrangement exists, shipment has occurred, selling price is fixed or determinable and collection is reasonably assured. Estimated warranty costs are accrued by management upon product shipment based on an estimate of future warranty claims. Page 4 Income Taxes-The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At April 30, 2004, the Company considered certain tax planning strategies in its assessment as to the recoverability of its tax assets. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. Use of Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including deferred tax asset valuation allowances and certain other reserves and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Some of the more significant estimates made by management include the allowance for doubtful accounts and sales returns, the deferred tax asset valuation allowance and other operating allowances and accruals. Actual results could differ from those estimates. Quantitative and Qualitative Disclosure About Market Risk The Company does not invest in market risk sensitive instruments. The Company's investments during the past fiscal year have consisted of overnight deposits with banks. The average principal sum invested was approximately $2.1 million and the weighted average effective interest rate for these investments was approximately 1.0%. The Company's rate of return on its investment portfolio changes with short-term interest rates, although such changes will not affect the value of its portfolio. The Company's objective in connection with its investment strategy is to maintain the security of its cash reserves without taking market risk with principal. The Company purchases and sells primarily in U.S. dollars. The Company sells in foreign currency (primarily Euros) to a limited number of customers and as such incurs some foreign currency risk. At any given time, approximately 5 to 10 percent of the Company's accounts receivable are denominated in currencies other than U.S. dollars. At present, the Company does not purchase forward contracts as hedging instruments, but could do so as circumstances warrant. Common Stock Information The Common Stock of the Company is traded on the NASDAQ National Market with the symbol "DRAM". The following table sets forth, for the periods indicated, the high and low prices for the Common Stock. 2004 2003 ___________________ __________________ High Low High Low ___________________ __________________ First Quarter $ 3.98 $ 2.42 $ 7.62 $ 2.61 Second Quarter 4.79 3.41 3.65 1.83 Third Quarter 7.12 3.75 4.39 2.42 Fourth Quarter 9.34 4.96 3.30 2.02 At April 30, 2004 there were approximately 7,000 shareholders. The Company has never paid a dividend and does not at present have an intention to pay a dividend in the foreseeable future. Page 5 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets April 30, 2004 and 2003 (In thousands, except share and per share amounts) 2004 2003 ______ ______ Assets Current assets: Cash and cash equivalents $ 6,806 $ 2,500 Trade receivables, less allowance for doubtful accounts and sales returns of $320 in 2004 and 2003 8,846 6,292 Income tax receivable - 3,138 Inventories: Raw materials 1,302 1,972 Work in process 102 39 Finished goods 1,133 844 ______ ______ 2,537 2,855 Deferred income taxes 723 723 Other current assets 92 111 ______ ______ Total current assets 19,004 15,619 ______ ______ Property and equipment: Land (held for sale) 875 875 Machinery and equipment 11,934 12,576 ______ ______ 12,809 13,451 Less accumulated depreciation and amortization 9,951 8,887 ______ ______ Net property and equipment 2,858 4,564 Other assets 50 24 ______ ______ $21,912 $20,207 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Accounts payable 3,862 3,208 Accrued liabilities 1,646 2,978 ______ ______ Total current liabilities 5,508 6,186 Stockholders' equity: Common stock, par value $1.00 per share. Authorized 54,000,000 shares; issued and outstanding 8,526,519 in 2004 and 8,497,219 in 2003 8,527 8,497 Additional paid-in capital 4,676 4,594 Retained earnings 3,201 930 ______ ______ Total stockholders' equity 16,404 14,021 ______ ______ Commitments and contingencies $21,912 $20,207 ====== ====== See accompanying notes to consolidated financial statements. Page 6 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended April 30, 2004, 2003 and 2002 (In thousands, except per share amounts) 2004 2003 2002 _______ _______ _______ Revenues $ 61,984 $ 53,529 $ 81,190 Costs and expenses: Cost of sales 46,311 39,529 56,737 Engineering and development 1,284 1,539 1,839 Selling, general and administrative 11,985 17,204 21,532 Restructuring charges - 3,805 1,200 Asset impairment charge - 11,535 5,856 _______ _______ _______ 59,580 73,612 87,164 _______ _______ _______ Earnings (loss) from operations 2,404 (20,083) (5,974) Other income (expense): Interest income 23 34 291 Interest expense (17) (118) (1,207) Currency gain 47 - - Other income 66 - - _______ _______ _______ 119 (84) (916) _______ _______ _______ Earnings(loss)before income tax expense (benefit) 2,523 (20,167) (6,890) Income tax expense (benefit) 252 (4,563) 1,211 _______ _______ _______ Net earnings (loss) $ 2,271 $(15,604)$ (8,101) ======= ======= ======= Net earnings(loss) per common share: Basic $ 0.27 $ (1.84) $ (0.95) Diluted $ 0.25 $ (1.84) $ (0.95) ======= ======= ======= See accompanying notes to consolidated financial statements. Page 7 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended April 30, 2004, 2003 and 2002 (In thousands) 2004 2003 2002 ______ _____ ______ Cash flows from operating activities: Net earnings (loss) $ 2,271 $(15,604) $(8,101) Adjustments to reconcile net earnings (loss)to net cash provided by operating activities: Asset impairment charge - 11,535 - Non-cash restructuring charges - 1,003 - Depreciation and amortization 1,847 3,925 10,450 Bad debt expense (recovery) 7 152 (65) Deferred income tax expense(benefit) - (1,294) 125 Changes in assets and liabilities: (Increase)decrease in trade and other receivables (2,561) 5,033 6,228 Decrease in inventories 318 2,580 490 Decrease (increase) in income tax receivable 3,138 (2,438) (699) (Increase) decrease in other current assets 19 345 (291) (Increase) decrease in other assets (26) 384 (43) Increase (decrease) in accounts payable 654 (3,490) (619) Increase (decrease) in accrued liabilities (1,332) 1,290 (2,256) _____ _____ _____ Net cash provided by operating activities 4,335 3,421 5,219 _____ _____ _____ Cash flows from investing activities: Additions to property and equipment (160) (673) (358) Proceeds from sale of property and equipment 19 - - _____ _____ _____ Net cash used in investing activities (141) (673) (358) _____ _____ _____ Cash flows from financing activities: Payment of term loan - - (10,000) Borrowings (repayment) under revolving line of credit - (3,800) 3,800 Principal payments under capital lease obligations - - (5,111) Purchase and subsequent cancellation of shares of common stock - (524) (650) Proceeds from sale of common shares under stock option plan (including tax benefits) 112 420 520 _____ _____ _____ Net cash provided by (used in) financing activities 112 (3,904) (11,441) _____ _____ _____ Net increase (decrease) in cash and cash equivalents 4,306 (1,156) (6,580) Cash and cash equivalents at beginning of year 2,500 3,656 10,236 _____ _____ _____ Cash and cash equivalents at end of year $ 6,806 $ 2,500 $ 3,656 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 16 $ 125 $ 1,177 Income taxes $ 2 $ 92 $ 1,772 ===== ===== ===== See accompanying notes to consolidated financial statements. Page 8 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) Years ended April 30, 2004, 2003 and 2002 (In thousands, except share amounts) Accumulated Total Additional other stock- Common paid-in Retained comprehens- holders' stock capital earnings ive income equity (loss) ______ ________ ________ ________ ________ Balance at April 30, 2001 8,492 4,065 25,403 83 38,043 Issuance of 98,550 shares under stock option plans, including income tax benefit of $191 99 421 - - 520 Purchase and subsequent cancellation of 96,950 shares (97) (81) (472) - (650) Comprehensive Income: Foreign exchange translation adjustment, net of tax - - - 16 16 Net loss - - (8,101) - (8,101) ______ Total comprehensive loss (8,085) ______ _______ _______ ______ ______ Balance at April 30, 2002 8,494 4,405 16,830 99 29,828 Issuance of 166,200 shares under stock option plans, including income tax benefit of $25 166 254 - - 420 Purchase and subsequent cancellation of 162,600 shares (163) (65) (296) - (524) Comprehensive Income: Foreign exchange translation adjustment, net of tax - - - (99) (99) Net loss - - (15,604) - (15,604) _______ Total comprehensive loss (15,703) ______ _______ _______ ______ _______ Balance at April 30, 2003 $ 8,497 $ 4,594 $ 930 $ - $14,021 Issuance of 29,300 shares under stock option plans, including income tax benefit of $7 29 82 - - 112 Net earnings - - 2,271 - 2,271 ______ _______ _______ ______ _______ Balance at April 30, 2004 $ 8,527 $ 4,676 $ 3,201 $ - $16,404 ====== ======= ======= ====== ======= See accompanying notes to consolidated financial statements. Page 9 Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) (1) Significant Accounting Policies Description of Business Dataram Corporation is a worldwide provider of server and workstation memory. The Company offers a specialized line of gigabyte-class memory for entry to enterprise-level servers and workstations as well as customized memory solutions for original equipment manufacturers. Principles of Consolidation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Until the closure of the Company's manufacturing operations in Denmark in the fourth quarter of fiscal 2003, the financial statements of its foreign subsidiaries were translated using the local currency as their functional currency. That is, assets and liabilities of the foreign subsidiaries were translated using the exchange rates in effect at the date of the balance sheet while the results of operations of those foreign subsidiaries were translated using the average exchange rates in effect for each year. Differences arising upon translation were then included as part of accumulated other comprehensive income (loss) in the Consolidated Statements of Stockholders' Equity and Comprehensive Income (loss). The closure of the operations in Denmark required the reversal of the balance in the cumulative foreign currency translation account in accumulated other comprehensive income (loss) since this event represented a substantial liquidation of those operations and such amount is included in the computation of the overall loss on the transaction (see note 2). Subsequently, the Company's foreign subsidiaries act only as marketing offices which are deemed to be essentially branches of the US company and the functional currency of these offices is considered to be the US dollar. Accordingly, from the date of this change, any amounts denominated in a currency other than the US dollar are being recorded at the balance sheet rate of exchange and gains and losses arising from changes in foreign currency rates for those assets and liabilities are being reported in the income statement. Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted cash, money market accounts and commercial paper purchased with original maturities of three months or less. Inventory Inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Property and Equipment Property and equipment is recorded at cost. Depreciation is generally computed on the straight-line basis. Depreciation and amortization rates are based on the estimated useful lives or lease terms for capital leases, whichever is shorter, which range from three to five years for machinery and equipment. When property or equipment is retired or otherwise disposed of, related costs and accumulated depreciation are removed from the accounts. Repair and maintenance costs are charged to operations as incurred. Goodwill and Acquired Intangible Assets The Company adopted Statement of Financial Accounting Standards SFAS No. 142, Goodwill and Other Intangible Assets effective May 1, 2001. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment periodically. On April 28, 2003, the Company restructured its worldwide operations. As part of the restructuring, the Company ceased production of memory for the PC market and closed its production facility in Aarhus, Denmark. As a consequence of this action, the Company concluded that the estimated fair value of its acquired business (MCT) had no remaining value and the Company wrote-off its purchased goodwill of approximately $11.1 million (see note 2). Long-Lived Assets Long-lived assets consist of property, plant and equipment. SFAS No.144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less cost to sell, and no longer depreciated. Page 10 The Company reviews long-lived assets for impairment whenever events or changes in business circumstances occur that indicate that the carrying amount of the assets may not be recoverable. Impairments are recognized when the expected future undiscounted cash flows derived from such assets are less than their carrying value. For such cases, losses are recognized for the difference between the fair value and the carrying amount. The Company considers various valuation factors, principally discounted cash flows, to assess the fair values of long-lived assets. Revenue Recognition Revenue is recognized upon shipment of goods to customers. The Company's revenue earning activities involve delivering or producing goods, and revenues are considered to be earned when the Company has completed the process by which it is entitled to such revenues. The following criteria are used for revenue recognition: persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured. Product Development and Related Engineering The Company expenses product development and related engineering costs as incurred. Engineering effort is directed to the development of new or improved products as well as ongoing support for existing products. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents in financial institutions and brokerage accounts. To the extent that such deposits exceed the maximum insurance levels, they are uninsured. The Company performs ongoing evaluations of its customers' financial condition, as well as general economic conditions and, generally, requires no collateral from its customers. In fiscal 2004, sales to one customer accounted for approximately 22% of revenues and 37% of accounts receivable at April 30, 2004. In fiscal 2003 and fiscal 2002, no customer generated revenues of 10% or greater. Net Earnings/(Loss) Per Share Net Earnings/(Loss) Per Share is presented in accordance with SFAS No. 128, "Earnings Per Share". Basic net earnings/(loss) per share is calculated by dividing net earnings/(loss) by the weighted average number of common shares outstanding during the period. Diluted net earnings per share in 2004 was calculated in a manner consistent with basic net earnings per share except that the weighted average number of common shares outstanding also includes the dilutive effect of stock options outstanding (using the treasury stock method). During 2003 and 2002, the Company excluded the dilutive effect of stock options in the calculation of diluted net loss per share, because they were anti-dilutive. As such, the numerator and denominator used in computing basic and diluted net loss per share are equal. The following presents a reconciliation of the numerator and denominator used in computing Basic and Diluted net earnings per share for fiscal 2004. (Earnings in thousands) Year ended April 30, 2004 Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 2,271 8,502,000 $ .27 Effect of dilutive securities - -stock options - 405,000 _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 2,271 8,907,000 $ .25 ======= ========= ====== Diluted net earnings (loss) per common share does not include the effect of options to purchase 463,080 shares of common stock for the year ended April 30, 2004 because they are anti-dilutive. Diluted net earnings (loss) per common share does not include the effect of options to purchase 1,515,350 shares of common stock for the year ended April 30, 2003 because they are anti-dilutive. Diluted net earnings (loss) per common share does not include the effect of options to purchase 1,797,800 shares of common stock for the year ended April 30, 2002 because they are anti-dilutive. Page 11 Product Warranty The majority of the Company's products are intended for single use; therefore, the Company requires limited product warranty accruals. The Company accrues estimated product warranty cost at the time of sale and any additional amounts are recorded when such cost are probable and can be reasonably estimated. Balance Charges to Balance Beginning Costs and End of Year Expenses Deductions of Year _________ _________ __________ ________ Year Ended April 30, 2004 $ 54 26 (26) $ 54 Year Ended April 30, 2003 $ 54 23 (23) $ 54 Year Ended April 30, 2002 $ 54 6 (6) $ 54 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to market data and other valuation techniques as appropriate. The Company believes that there is no material difference between the fair value and the reported amounts of financial instruments in the consolidated balance sheets. Stock Based Compensation At April 30, 2004, the Company has stock-based employee and director compensation plans, which are described more fully in Note 7. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based compensation cost is reflected in net income for stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to stock-based employee compensation: Years ended April 30 -------------------------- 2004 2003 2002 -------- -------- -------- Net earnings (loss), as reported $ 2,271 $(15,604) $(8,101) Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards (784) (885) (1,191) -------- -------- -------- Pro forma under SFAS 123 $ 1,487 $(16,489) $(9,292) -------- -------- -------- Basic and diluted net earnings (loss) per common share: Basic: As reported $ .27 $ (1.84) $ (.95) Pro forma under SFAS 123 .17 (1.94) (1.10) Diluted: As reported $ .25 $ (1.84) $ (.95) Pro forma under SFAS 123 .17 (1.94) (1.10) Page 12 The fair value of each stock option granted during the year is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 2004 2003 2002 ------- ------- ------- Expected life (years) 7.5 7.5 7.5 Expected volatility 57% 72% 63% Expected dividend yield - - - Risk-free interest rate 3.0% 5.0% 5.0% Weighted average fair value of options granted during the year $ 2.50 $ 2.19 $ 5.62 (2) Acquisition and Restructuring of Operations On March 23, 2001, the Company acquired certain assets, principally including inventory, accounts receivable and equipment of Memory Card Technology A/S ("MCT"), a corporation in suspension of payments under Danish bankruptcy law. MCT designed and manufactured memory from its facility in Denmark and had sales offices in Europe, Latin America and the Pacific Rim. The Company purchased the assets from MCT for total consideration of approximately $32,006 of which approximately $28,581 was paid in cash plus the assumption of certain payables and accrued expenses, certain direct transaction cost and certain MCT employee rationalization costs all of which total approximately $3,425. The net assets acquired by the Company were recorded at their respective fair values under the purchase method of accounting. The Company evaluated the carrying value of both its intangible assets and goodwill as of May 1, 2001 and concluded that such assets had not been impaired. Due to the pressure on the Company's worldwide operations during fiscal 2002 caused by continued economic weakness and its associated impact on capital spending coupled with the overall decline in pricing for DRAMs and its associated impact on the Company's selling prices, the Company was required to perform another impairment analysis for both the intangible assets and the acquired goodwill. That analysis was performed in the third quarter ended January 31, 2002. The Company evaluated the carrying value of goodwill as of that date and concluded that the asset had not been impaired. The Company also evaluated the carrying value of its intangible assets (acquired customer base) and concluded that it was in fact impaired. The Company's integration activities included: narrowing its combined product offerings to certain strategic platforms; redefining its targeted customer base; and directing the efforts of its acquired sales force to sell memory products only for those identified platforms through the targeted customer base. As a result, the Company's customer base has changed and the future cash flows expected to be generated by the acquired customer base, as it existed at the date of acquisition no longer supported any carrying value for those assets. Accordingly, the Company fully amortized its intangible assets in fiscal 2002, which totaled $5.8 million. During the fourth quarter of fiscal 2003, the Company announced a restructuring of its operations. As part of this restructuring, the Company ceased production of memory for the PC market and closed its production facility in Aarhus, Denmark. The Company has consolidated all manufacturing into its facility located in Bucks County, Pennsylvania. As a result, the Company reduced its workforce by approximately 28 percent and incurred a consolidated pretax charge of approximately $3,800 in the fourth quarter, which consists primarily of additional depreciation and amortization of fixed assets in Denmark, a provision for leasehold impairment, a write down of PC related inventory and severance payments. Additionally, the Company wrote-off its purchased goodwill of $11,144. Of these amounts, $300 has been charged to cost of sales, with the balance recorded as restructuring charges of $3,065 million and asset impairment charges of $11,535, which is net of the effect of certain foreign exchange translation gains. The Company has entered into lease termination agreements totaling approximately $1,000 and has severance obligations totaling approximately $850. The lease termination obligations were paid in the first quarter of fiscal 2004. Approximately $750 of the severance obligations was paid by the end of the first quarter of fiscal 2004 with the balance of approximately $100 paid in the second quarter of fiscal 2004. An additional restructuring charge had been recorded in June 2002, which totaled $740 and was primarily related to severance costs. The severance payments have all been made as of April 30, 2003. Fiscal 2002 restructuring charges were $1,200, also severance related. As of April 30, 2002, the Company had paid the majority of these costs, except for approximately $50, which was paid in early fiscal 2003. (3) Long-Term Debt On March 31, 2001, the Company drew $10,000 against its existing credit facility to fund a portion of the purchase price of the MCT acquisition. On April 16, 2001, the Company entered into a new $10,000 term note ("term note") and a $15,000 revolving credit line ("credit line") with a commercial bank (together, referred to as the "credit facility"), which expires on April 16, 2004. The credit facility contains financial covenants as defined in the agreement for which the Company was in compliance with at April 30, 2002. The proceeds from the term note were used to repay the existing obligation under the original credit facility. The term note was due in twenty quarterly installments of $500 until March 31, 2006. The term note bore interest, which was payable monthly in arrears, at the LIBOR rate for 90 day maturities plus 1.9% computed on the basis of a 360 day year for the actual number of days elapsed. In January 2002, the Company amended and restated its credit facility. In doing so, the Company repaid the term note in its entirety. As of April 30, 2002, there was $3,800 outstanding on the revolving credit line that was paid in fiscal 2003. On April 4, 2003, the Company terminated this credit facility. Page 13 (4) Income Taxes Income tax expense(benefit)for the years ended April 30 consists of the following: (In thousands) 2004 2003 2002 _____ _____ _____ Current: Federal $ 47 $(3,307) $ 870 Foreign - 37 103 State 205 1 113 _____ _____ _____ 252 (3,269) 1,086 _____ _____ _____ Deferred: Federal - (1,247) (8) Foreign - - 134 State - (47) (1) _____ _____ _____ - (1,294) 125 _____ _____ _____ Total income tax expense $ 252 $(4,563) $ 1,211 ===== ===== ===== The actual income tax expense (benefit) differs from "expected" tax expense (benefit) (computed by applying the U. S. corporate tax rate of 35% to earnings before income taxes) as follows: 2004 2003 2002 _____ _____ _____ Computed "expected" tax expense(benefit) $ 883 $(7,058) $(2,411) State income taxes(net of Federal income tax benefit) 150 (30) 74 Difference in federal graduated rates - 202 (21) Difference in foreign income tax - - 451 Foreign taxes - 37 103 Foreign permanent differences - - 598 Change in valuation allowances - 2,504 2,400 Utilization of net operating Losses (1,191) - - Alternative minimum tax 232 - - Other 178 (218) 17 _____ _____ _____ $ 252 $(4,563) $ 1,211 ===== ===== ===== Page 14 The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: (In thousands) 2004 2003 ____ ____ Deferred tax assets: Compensated absences, principally due to accrual for financial reporting purposes $ 94 $ 98 Accounts receivable, principally due to allowance for doubtful accounts and sales returns 119 119 Property and equipment, principally due to differences in depreciation 142 303 Inventory, principally due to reserve for obsolescence 143 131 Domestic net operating losses 4,944 6,135 Alternative minimum tax 217 - ____ ____ Total gross deferred tax assets 5,659 6,786 ____ ____ Less valuation allowance (3,777) (4,904) Net deferred tax asset 1,882 1,882 Deferred tax liabilities: Investment in wholly-owned subsidiary, principally due to unremitted earnings of DISC (663) (663) Other (496) (496) ____ ____ Total gross deferred tax liabilities (1,159) (1,159) ____ ____ Net deferred tax assets (liabilities) $ 723 $ 723 ==== ==== At April 30, 2004 a valuation allowance of $3,777 has been provided for on the deferred tax assets since management believes that it is more likely than not that such assets will not be realized through the reversal of existing deferred tax assets, future taxable income, or certain tax planning strategies. The Company has U.S. net operating loss carry forwards of approximately $14,400, which can be used to offset income through 2023. Page 15 (5) Stock Option Plans The Company has an 1992 incentive and non-statutory stock option plan for the purpose of permitting certain key employees to acquire equity in the Company and to promote the growth and profitability of the Company by attracting and retaining key employees. In general, the plan allows granting of up to 2,850,000 shares, adjusted for stock splits, of the Company's common stock at an option price to be no less than the fair market value of the stock on the date such options are granted. The holder of the option may purchase 20% of the common stock with respect to which the option has been granted on or after the first anniversary of the date of the grant and an additional 20% of such shares on or after each of the four succeeding anniversary dates. At April 30, 2004, 960,350 of the outstanding options are exercisable. The Company also has a 2001 incentive and non-statutory stock option plan for the purpose of permitting certain key employees to acquire equity in the Company and to promote the growth and profitability of the Company by attracting and retaining key employees. In general, the plan allows granting of up to 1,800,000 shares of the Company's common stock at an option price to be no less than the fair market value of the Company's common stock on the date such options are granted. The holder of the option may purchase 25% of the common stock with respect to which the option has been granted on or after the first anniversary of the date of the grant and an additional 25% of such shares on or after each of the three succeeding anniversary dates. At April 30, 2004, 87,875 of the outstanding options are exercisable. The status of the plans for the three years ended April 30, 2004, is as follows: Options Outstanding ________________________________________________ Exercise price Weighted average Shares per share exercise price _________ ______________ ___________ Balance April 30, 2001 1,541,450 $ 1.708-24.250 $ 5.626 Granted 192,900 6.610-10.000 8.316 Exercised (38,300) 1.708- 6.000 4.458 Cancelled (253,000) 1.708- 6.000 12.652 _________ ____________ ____________ Balance April 30, 2002 1,443,050 1.708-24.250 4.785 Granted 156,800 2.990- 3.830 3.017 Exercised (156,000) 1.708- 2.375 2.349 Cancelled (108,500) 2.990-24.250 7.440 _________ ____________ ___________ Balance April 30, 2003 1,335,350 1.708-24.250 4.646 Granted 130,000 4.090 4.090 Exercised (29,300) 2.990- 3.604 3.573 Cancelled (69,850) 2.990-24.250 7.641 _________ ____________ ___________ Balance April 30, 2004 1,366,200 $ 1.708-24.250 $ 4.463 ========= ============ =========== The Company also granted non-qualified options to acquire 150,000 shares of common stock to certain employees in connection with the acquisition of certain assets of MCT. These options are exercisable at a price of $9.875 per share, which represents the fair value at the date of grant and expire ten years after the date of grant. Of each option, 20% are exercisable on or after the first anniversary of the date of the grant and an additional 20% on or after each of the four succeeding anniversary dates. During fiscal year 2003, 50,000 of these shares were cancelled. At April 30, 2004, 60,000 of the outstanding options are exercisable. The Company also periodically grants nonqualified stock options to non- employee directors of the Company. These options are granted for the purpose of retaining the services of directors who are not employees of the Company and to provide additional incentive for such directors to work to further the best interests of the Company and its shareholders. The options granted to these non-employee directors are exercisable at a price representing the fair value at the date of grant, and expire ten years after date of grant. Of each option, 100% are exercisable one year after the date of grant. At April 30, 2004, 80,000 of the outstanding options are exercisable. Page 16 The status of the non-employee director options for the three years ended April 30, 2004, is as follows: Options Outstanding ________________________________________________ Exercise price Weighted average Shares per share exercise price _________ _____________ ____________ Balance April 30, 2001 225,000 $ 2.313-2.813 $ 2.763 Granted 40,000 7.980 7.980 Exercised (60,250) 2.313-2.813 2.626 Cancelled - - - ________ ____________ ____________ Balance April 30, 2002 204,750 2.313-7.980 3.822 Granted 40,000 2.990 2.990 Exercised (10,000) 2.813 2.813 Cancelled (154,750) 2.813 2.813 ________ ____________ ____________ Balance April 30, 2003 80,000 2.990-7.980 5.485 Granted 40,000 4.090 4.090 Exercised - - - Cancelled - - - ________ ____________ ____________ Balance April 30, 2004 120,000 $ 2.990-7.980 $ 5.020 ======== ============ ============ The following table summarizes information about stock options outstanding at April 30, 2004: Options outstanding Options exercisable ___________________________________ ____________________________ Number Weighted Number out- average Weighted exercis- Weighted Range of standing remaining average able at average exercise at April contractual exercise April 30, exercise price 30, 2004 life price 2004 price ____________ _________ _________ ________ _________ ________ $1.708- 2.813 699,000 3.13 $ 2.64 699,000 $ 2.64 2.990- 3.604 321,000 6.11 3.26 230,775 3.37 4.090- 7.980 382,700 8.08 5.87 149,450 7.06 9.875-11.380 135,500 6.84 10.21 80,200 10.22 24.250 48,000 6.25 24.25 28,800 24.25 ____________ _________ __________ _______ _________ _______ $1.708-24.250 1,586,200 5.34 $ 4.85 1,188,225 $ 4.37 ============ ========= ========== ======= ========= ======= Page 17 (6) Accrued Liabilities Accrued liabilities consist of the following at April 30: 2004 2003 -------- -------- Royalty (See note 7) $ 755 $ 36 Payroll, including vacation 344 427 Commissions 125 67 Taxes 136 - Leasehold termination provision - 1,000 Severance - 850 Other restructuring costs - 261 Other 286 337 -------- -------- $ 1,646 $ 2,978 ======== ======== (7) Commitments Leases The Company and its subsidiaries occupy various facilities and operate various equipment under operating lease arrangements. Rent charged to operations pursuant to such operating leases amounted to approximately $692 in 2004, $1,552 in 2003 and $1,375 in 2002. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2004 are as follows: Operating Year ending April 30: Leases ------- 2005 $ 531 2006 463 2007 48 2008 and thereafter 0 ------- Total minimum lease payments $ 1,042 ======= At April 30, 2004, the Company had open purchase orders outstanding totaling $6,217 primarily for inventory items to be delivered in the first quarter of fiscal 2005. These purchase orders are cancelable. License Agreements The Company has entered into certain licensing agreements with varying terms and conditions. The Company is obligated to pay royalties on certain of these agreements. Legal Proceedings The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's consolidated financial position, results of operations or liquidity. (8) Employee Benefit Plan The Company has a defined contribution plan (the Plan) which is available to all qualified employees. Employees may elect to contribute a portion of their compensation to the Plan, subject to certain limitations. The Company contributes a percentage of the employee's contribution, subject to a maximum of 6 percent of the employee's eligible compensation, based on the employee's years of service. The Company's matching contributions aggregated approximately $273, $258 and $210 in 2004, 2003 and 2002, respectively. Page 18 (9) Revenues by Geographic Location The Company operates in one business segment and develops, manufactures and markets a variety of memory systems for use with servers and workstations which are manufactured by various companies. Revenues and total assets for 2004, 2003 and 2002 by geographic region is as follows: United Europe Other Consolidated States _______ _______ ______ ____________ April 30, 2004 Revenues $ 43,780 $ 10,994 $ 7,210 $ 61,984 Total assets $ 20,963 $ 949 $ 0 $ 21,912 Long lived assets $ 2,811 $ 47 $ 0 $ 2,858 April 30, 2003 Revenues $ 29,495 $ 13,180 $10,854 $ 53,529 Total assets $ 15,398 $ 4,809 $ 0 $ 20,207 Long lived assets $ 4,473 $ 91 $ 0 $ 4,564 April 30, 2002 Revenues $ 39,296 $ 27,131 $14,763 $ 81,190 Total assets $ 14,671 $ 25,658 $ 2,233 $ 42,562 Long lived assets $ 5,103 $ 15,071 $ 180 $ 20,354 (10) Quarterly Financial Data (Unaudited) Quarter Ended ____________________________________________ Fiscal 2004 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $12,267 $12,638 $17,131 $19,948 Gross profit 3,449 3,006 4,208 5,010 Net earnings(loss) 171 (162) 732 1,530 Net earnings (loss)per diluted Common and common equivalent .02 (.02) .08 .17 share Quarter Ended ____________________________________________ Fiscal 2003 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $14,281 $13,970 $12,758 $12,520 Gross profit 3,541 4,200 3,472 2,786 Net earnings(loss) (1,823) (253) (793) (12,735) Net earnings (loss)per diluted Common and common equivalent (.21) (.03) (.09) (1.50) share Earnings per share is calculated independently for each quarter and therefore may not equal the total for the year. Page 19 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Dataram Corporation: We have audited the accompanying consolidated balance sheets of Dataram Corporation and subsidiaries as of April 30, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended April 30, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dataram Corporation and subsidiaries as of April 30, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three- year period ended April 30, 2004, in conformity with U.S. generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," for all business combinations consummated after June 30, 2001 and the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" effective May 1, 2001. KPMG LLP Short Hills, New Jersey June 3, 2004 Selected Financial Data (Not covered by independent auditors' report) (In thousands, except per share amounts) Years Ended April 30, 2004 2003 2002 2001 2000 ______________________ ____ ____ ____ ____ ____ Revenues $ 61,984 $ 53,529 $ 81,190 $ 130,577 $109,152 Net earnings (loss) 2,271 (15,604) (8,101) 8,595 7,846 Basic earnings (loss) per share .27 (1.84) (.95) 1.01 .99 Diluted earnings (loss) per share .25 (1.84) (.95) .88 .81 Current assets 19,004 15,619 21,800 34,690 35,127 Total assets 21,912 20,207 42,562 65,281 40,151 Current liabilities 5,508 6,186 8,287 14,157 12,416 Long-term debt - - 3,800 10,000 - Total stockholders' equity 16,404 14,021 29,828 38,043 26,894 Cash dividends - - - - - Earnings per share data has been adjusted to reflect the three-for-two stock split for shareholders of record on November 24, 1999. Page 20 DIRECTORS AND CORPORATE OFFICERS Directors Robert V. Tarantino Chairman of the Board of Directors, President and Chief Executive Officer of Dataram Corporation Richard Holzman* Private Investor Thomas A. Majewski* Principal, Walden Inc. Bernard L. Riley* Private Investor Roger C. Cady* Principal, Arcadia Associates *Member of audit committee Corporate Officers Robert V. Tarantino President and Chief Executive Officer Lars Marcher Executive Vice President, and Chief Operating Officer Mark E. Maddocks Vice President, Finance and Chief Financial Officer Jeffrey H. Duncan Vice President of Manufacturing and Engineering Hugh F. Tucker Vice President, Sales Mark R. Bresky Vice President, Information Technology Anthony M. Lougee Controller Thomas J. Bitar Secretary Member, Dillon, Bitar & Luther, L.L.C. Corporate Headquarters Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 609-799-0071 Auditors KPMG LLP Short Hills, NJ General Counsel Dillon, Bitar & Luther, L.L.C. Morristown, NJ Transfer Agent and Registrar Wachovia Bank Customer Information Center 1525 West W.T. Harris Boulevard Building 3C3 Charlotte, NC 28288 Stock Listing Dataram's common stock is listed on the NASDAQ with the trading symbol DRAM. Annual Meeting The annual meeting of shareholders will be held on Tuesday, September 14, 2004, at 2:00 p.m. at Dataram's corporate headquarters at: 186 Princeton Road (Route 571) West Windsor, NJ 08550 Form 10-K A copy of the Company's annual report on Form 10-K filed with the Securities & Exchange Commission is available without charge to shareholders. Address requests to: Vice President, Finance Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 Corporate Headquarters Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 Toll Free: 800-DATARAM Phone: 609-799-0071 Fax: 609-799-6734 www.dataram.com