DATARAM CORPORATION THE MEMORY SPECIALISTS 1996 ANNUAL REPORT [DATARAM LOGO] CORPORATE PROFILE Dataram is the leading independent manufacturer of memory boards for computer workstations, servers and minicomputers. With nearly 30 years of experience designing and manufacturing memory boards for the industry, we offer a broad range of products for Apple, Compaq, DEC, HP, IBM and Silicon Graphics computers. We sell our products through distributors, VARs, resellers, system integrators and OEMs into such diverse industries as manufacturing, finance, government, telecommunications, utilities, research and education. Our ability to respond quickly to change -- in business conditions, technology and the needs of memory users -- uniquely positions us for future growth in markets throughout the world. FINANCIAL HIGHLIGHTS (Dollar figures in thousands, except per share amounts Fiscal Year 1996 1995 1994 1993 _______ _______ ______ ______ Revenues $107,627 $103,028 $79,573 $58,564 Net earnings (loss) 1,450 (1,299) (732) 3,018 Net earnings (loss) per common and common share equivalent 0.38 (0.34) (0.19) 0.76 Working capital 16,803 14,061 15,540 16,699 Stockholders' equity 18,078 16,390 17,903 18,684 Long-term debt 0 0 0 0 Revenue per employee $ 2,031 $ 902 $ 527 $ 405 TABLE OF CONTENTS 1 Stockholders' Letter 3 Management's Discussion and Analysis 6 Financial Review To Our Stockholders In a year of rapid change and severe challenge, Dataram relied on its experience and resiliency to restore profitability and maintain its position as a leading participant in the computer memory industry. For the fiscal year ended April 30, 1996, Dataram achieved $1.45 million in net earnings, or $.38 per share, versus a loss of $1.3 million, or $.34 per share, for the year earlier period. Earning a profit in the face of a 50 percent decline in selling prices during the last four months of fiscal 1996 tested the dedication of our entire organization. Chip Price Decline For the first six months of fiscal 1996, DRAM (dynamic random- access memory) chips, which comprise about 95 percent of our product cost, were in extremely short supply due to the sustained dynamic growth of workstations, personal computers and servers. We capitalized on our relationships with various suppliers to ensure chip quantities sufficient to meet our customer demand for our products. When DRAMs suddenly became readily available and their prices declined dramatically in the third quarter, we were obligated to value our inventory to reflect the new market condition and at the same time reduce selling prices for our computer memory products to remain competitive. As a result, we incurred a loss during the third quarter. Why did falling chip prices adversely affect product selling prices? About three years ago, the emergence of simplified memory boards for open system workstations virtually transformed specialized memory products into commodity items. Consequently, prices for these products were closely tied to their major cost component -- DRAM chips. Dataram successfully streamlined manufacturing operations last year, restructuring the workforce and relocating production capability to a highly automated facility located near our Princeton headquarters. Today we are positioned to profitably participate in a challenging, high-volume, low-margin industry. A Return to Profitability By reacting promptly to the changed reality of the DRAM marketplace we restored profitability in the fourth quarter and for fiscal 1996. Our present ability to purchase chips on an as-needed basis has enabled us to maintain a low inventory and still fulfill customer orders on a same day basis. Inventories at the end of fiscal 1996 were $2.3 million, a 71 percent decrease from the previous year. Dataram is growing at a faster rate than the computer memory industry, estimated at 15 percent annually. Although selling prices declined by approximately 40 percent during the fourth quarter, revenues decreased by only 22 percent, confirming the sustained strong demand for our memory products. Pursuing Strategic Initiatives Almost three decades of experience in the computer memory business have seasoned and prepared us to overcome the challenges inherent in a rapidly changing, technologically-driven growth industry. In last year's annual report, we disclosed our strategy to continue growth into the foreseeable future. While responding rapidly to daily business challenges, we retained our focus and vision for the future. Thus, it is appropriate to restate these objectives and the progress we made in fiscal 1996. o Increase unit volume as a low cost producer. Unit volume increased approximately 25 percent over the previous fiscal year. State-of-the-art manufacturing capabilities, combined with a streamlined, cost-efficient support structure, are enabling us to contain costs and remain profitable. o Increase revenues abroad by expanding into additional foreign markets. During the year, Dataram broadened its global reach by establishing relationships with successful Latin American distributors. International revenues comprised 25 percent of total sales in fiscal 1995. Today, revenues from foreign markets represent 30 percent of overall sales volume. o Broaden our product line. Declining chip prices and commensurate reductions to product selling prices present a formidable challenge to stabilizing revenue. While continuing our strong participation in the workstation and server markets, we believe we can obtain a larger share of the personal computer market. To this end, we have made strategic additions to sales/marketing staff in efforts to increase our participation in this market. Utilizing the World Wide Web Dataram is harnessing the power of the World Wide Web (WWW) which has enabled us to facilitate sales and improve productivity. For the last year, Dataram's WWW Home Page (http://www.dataram.com) has provided customers and shareholders with important information about the Company, including financial results, product offerings and technical support. Our distributors can download this information and add their own logos, addresses and phone numbers to customize Dataram product information to fit their needs. Dataram recently established a Virtual Sales Office (VSO), affording customers the opportunity to trace orders from initial entry to type of shipment, specific carrier and time of arrival, 24 hours a day, seven days a week. VSO also provides the mechanism for direct order entry by our strategic partners and E-Mail communications between customers and our sales department, further improving our capability to respond quickly to customer needs. In addition to enhancing customer service, VSO's inherent efficiency increases sales staff productivity. Focused For Future Growth We are writing this letter midway through the first quarter of fiscal 1997, and are encouraged that the favorable financial results achieved in the fourth quarter are continuing. We believe we will continue to profitably participate in an expanding computer memory marketplace by: o Retaining our computer memory focus. As leading computer memory specialists, future efforts to broaden our product line will center on complementary products such as add-on memory for personal computers. o Sustaining our technological advantage. Dataram always has been in the forefront of computer memory technological advances. We plan to retain this strategic advantage. For example, Dataram recently shipped memory products incorporating the next generation of 64 megabit chip technology. o Maintaining a strong financial condition. Dataram ended fiscal 1996 with no debt, an unused $11 million line of credit and a current ratio of 3.4 to 1. With strong operating cash flow and minimal planned capital expenditures, Dataram enters fiscal 1997 with ample financial resources to finance and implement its strategic growth initiatives. Demonstrating confidence in management's ability to sustain satisfactory operating results in a challenging environment, the Board of Directors has approved an Open Market Repurchase Plan to repurchase up to 500,000 shares of Dataram Common Stock. The Board said it believes that, given the current trading prices of our common stock, such repurchases would be of long-term benefit to shareholders. We extend deepest appreciation to our employees, who continued working with diligence and dexterity in a difficult year; and to our customers, who once again demonstrated their confidence in our organization. Sincerely, JOHN J. CAHILL John J. Cahill Chairman ROBERT V. TARANTINO Robert V. Tarantino President and Chief Executive Officer July 14, 1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Dataram is a developer, manufacturer and marketer of quality computer memory products for use with computers, workstations and servers. The Company's memory products, principally for workstations and servers manufactured by Sun, Hewlett-Packard, Digital Equipment Corporation, IBM, Apple, Compaq and Silicon Graphics, are sold worldwide to distributors, value-added resellers and large end users. Computer memory products are produced by original equipment manufacturers including those mentioned above, Dataram Corporation and several other large independent memory manufacturers as well as a number of small job shops and specialty houses. Competition is fierce, and memory boards for the computer workstation and server markets are commodity items with low individual profit margins. The primary raw material used in producing memory boards are dynamic random access memory (DRAM) chips. The purchase cost of DRAM chips typically represents approximately 95% of the total cost of a finished workstation memory board. Consequently, average selling prices for computer memory boards are extremely 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, 1996 1995 1994 _____________________ ____ ____ ____ Revenues 100.0% 100.0% 100.0% Cost of sales 90.0 88.1 81.7 _____ ______ _____ Gross profit 10.0 11.9 18.3 Engineering and development 1.5 2.4 4.2 Selling, general and administrative 6.2 11.1 15.9 _____ ______ _____ Earnings (loss) from operations 2.3 (1.6) (1.8) Other income (expense), net (0.1) (0.4) 0.0 _____ ______ _____ Earnings (loss) before income taxes 2.2 (2.0) (1.8) Income taxes (benefit) 0.9 (0.7) (0.9) _____ ______ _____ Net earnings (loss) 1.3 (1.3) (0.9) ===== ====== ====== Fiscal 1996 Compared With Fiscal 1995 The computer memory market changed dramatically in fiscal 1996. Up until late calendar 1995, DRAM chips had been in tight supply for a period of approximately two and one-half years, primarily because of the explosive growth in demand for personal computers. Chip manufacturers allocated DRAMs to OEMs and the larger independent memory manufacturers. Smaller manufacturers were forced to obtain DRAMs on the spot market at premium prices. Starting in late 1995, this situation changed. Chip manufacturers had invested heavily in production capacity and the growth rate for personal computers slowed modestly. Supply suddenly exceeded demand. In the ensuing inventory correction, the supply of DRAMs became plentiful and their prices plummeted. Competitive pressures forced computer memory manufacturers to lower the selling prices of memory boards as well. At present, most DRAMs are readily available and are expected to remain so for the foreseeable future. Consequently, average selling prices for computer memory boards are likely to remain under pressure. However, the workstation and server markets are expanding markets and the unit volume growth rate for memory products remains high. Revenues in 1996 totaled $107.6 million, an increase of 4.5% over 1995 revenues of $103.0 million. Revenues from the sale of products for Sun and Hewlett-Packard manufactured workstations and computers totalled 74.6% of revenue. Revenues for fiscal 1996 were negatively impacted in the fourth quarter by the decline in average selling prices for memory boards associated with the reduction in the price of DRAMs. Cost of sales increased $6.2 million in fiscal 1996 from fiscal 1995. Cost of sales as a percentage of revenue increased by 1.9% in fiscal 1996 from fiscal 1995. For most of the first three quarters of fiscal 1996, cost of sales to support incremental business was increased by the necessity of procuring DRAM chips from sources of supply less competitively priced than the Company's primary vendors. Engineering and development costs amounted to $1.6 million in 1996, a decrease of $0.9 million from fiscal 1995 expenditures of $2.5 million. This was primarily the result of a work force reduction implemented in the fourth quarter of fiscal 1995 associated with the previously announced decision to withdraw from the storage product business. The Company intends to maintain its commitment to timely introduction of new memory products. Selling, general and administrative costs decreased by 4.9% of revenue to $6.7 million in fiscal 1996 from $11.5 million in fiscal 1995. As a result of the decision to withdraw from the storage product business in the fourth quarter of fiscal 1995, the Company's general and administrative, sales and marketing forces were significantly reduced. Other expense, net of other income totaled $61,000 in 1996 versus $364,000 in 1995. Fiscal 1996 expense consists primarily of net interest expense. Included in 1995 expenses are $162,000 related to disposals of fixed assets associated with the storage product line. The balance of 1995 net other expense consists primarily of interest expense offset by income from salvage of certain obsolete equipment and inventory items. Fiscal 1995 Compared With Fiscal 1994 Dataram announced in the fourth quarter of fiscal 1995 that it was phasing out of its line of storage products. The phase out resulted in a one time pre-tax charge to operations of $3.1 million for inventory write downs and disposals, severance expenses and other costs related to storage operations. The decision to withdraw from the storage business at this time was primarily due to the fact that the rapidly changing demands of the storage marketplace necessitated frequent product design changes with little opportunity to recover development costs. It was unclear as to when the Company's storage unit volumes could reach a profitable level. The Company's computer memory business accounted for 94% of total revenues in fiscal 1995 and was profitable. As a result of the restructuring in fiscal 1995 and 1994, the Company substantially reduced its cost of doing business. At the sales volume level of fiscal 1995, engineering and development expense and selling, general and administrative expenses are expected to be less than 10% of revenues. Revenues in 1995 totaled $103.0 million, an increase of 29.5% over 1994 revenues of $79.6 million. Revenues from the sale of products for Sun and Hewlett-Packard workstations and computers were the leading contributors, totaling 66.5% of revenue. Revenues from the storage product line amounted to 6.2% of total 1995 revenues. Cost of sales as a percentage of revenue increased by 6.4% or $25.8 million in fiscal 1995 from fiscal 1994. Cost of sales for memory products as a percentage of revenue for fiscal 1995 did not change significantly from fiscal 1994 year end levels. Memory product margins are not expected to improve in the foreseeable future. Engineering and development costs amounted to $2.5 million in 1995, a decrease of $0.8 million over fiscal 1994 expenditures. This was primarily the result of a work force reduction implemented in the fourth quarter of fiscal 1994. Today's less complex workstation and server memories require less design effort. Selling, general and administrative costs decreased by 4.8% of revenue to $11.5 million in fiscal 1995 from $12.7 million in fiscal 1994. This decrease in costs was primarily the result of work force restructuring made in the fourth quarter of fiscal 1994. During fiscal 1995, memory product sales were primarily generated by the Company's internal sales team. As a result of the decision to withdraw from the storage product business, the Company's external sales and storage marketing force was significantly reduced in the fourth quarter of fiscal 1995. Other expense, net of other income totaled $364,000 in 1995 versus $8,000 in 1994. Fiscal 1995 expenses include $296,000 of interest expense as well as $162,000 associated with the disposal of fixed assets related to the storage product line offset by income from salvage of certain obsolete equipment and inventory items. Liquidity and Capital Resources The Company maintained a strong financial condition throughout 1996. A line of credit was used during the year to deal with peak cash demands. At the end of the year there was no outstanding balance owed on the credit line. Working capital at the end of fiscal 1996 amounted to $16.8 million, including cash and cash equivalents of $8.5 million, compared to working capital of $14.1 million, including cash of $0.7 million in fiscal 1995. Current assets at year end were 3.4 times current liabilities compared to 2.3 at the end of 1995. Inventories at the end of 1996 were $2.3 million, a decrease of 71.3% over 1995 year-end inventories of $8.1 million. The decrease in inventories was largely attributable to the change in the DRAM marketplace which occurred in late 1995. Currently, DRAMs are readily available, and customer delivery requirements can be satisfied without maintaining large inventory levels. Capital expenditures were $270,000 in 1996 compared to $581,000 in 1995. Capital expenditures for both years were primarily for automated testing equipment and management information systems upgrades. At the end of fiscal 1996, contractual commitments for capital purchases were nil. Capital expenditures in fiscal 1997 are expected to be in the same range as fiscal 1996 expenditures. In June of 1996, the Company announced an open market repurchase plan providing for the repurchase of up to 250,000 shares of the Company's common stock. In July of 1996, the plan was amended to provide for the purchase of up to 500,000 shares of the Company's common stock. Inflation has not had a significant impact on the Company's revenue and operations. At year-end, the Company had no long-term debt outstanding and had available a committed line of credit providing for borrowings of up to $11 million, of which $10 million is a revolving credit facility and $1 million is a term loan facility. These facilities are still in place. Management believes that its working capital together with internally generated funds and its bank line of credit are adequate to finance the Company's stock repurchase plan, operating needs and future capital requirements. Common Stock Information The Common Stock of the Company is traded on the American Stock Exchange under the symbol "DTM". The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported by the American Stock Exchange. 1996 1995 ___________________ __________________ High Low High Low ___________________ __________________ 1st Quarter 7 3/4 4 5/8 5 5/8 4 1/8 2nd Quarter 9 3/8 6 1/4 5 7/8 4 1/4 3rd Quarter 8 7/8 5 3/8 7 5/8 4 5/8 4th Quarter 7 4 1/8 7 4 1/2 At April 30, 1996 there were approximately 2,000 shareholders. The Company has never paid a dividend and does not at present have an intention to pay a dividend in the foreseeable future. DATARAM CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets April 30, 1996 and 1995 (In thousands, except share amounts) 1996 1995 ______ ______ Assets Current assets: Cash and cash equivalents $ 8,482 $ 722 Trade receivables, less allowance for doubtful accounts of $800 in 1996 and $695 in 1995, respectively 12,078 14,721 Inventories: Raw materials 1,435 4,726 Work in process 45 648 Finished goods 832 2,687 ______ ______ 2,312 8,061 Income tax receivable (note 4) 424 676 Deferred income taxes (note 4) 389 486 Other current assets 50 44 ______ ______ Total current assets 23,735 24,710 ______ ______ Property and equipment, at cost: Land 875 875 Machinery and equipment 6,190 5,952 ______ ______ 7,065 6,827 Less accumulated depreciation 4,867 4,197 ______ ______ Net property and equipment 2,198 2,630 Other assets 6 15 ______ ______ $25,939 $27,355 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 5,909 $ 8,780 Accrued liabilities (note 7) 1,023 1,869 ______ ______ Total current liabilities 6,932 10,649 Deferred income taxes (note 4) 929 316 ______ ______ Total liabilities 7,861 10,965 ______ ______ Stockholders' equity (note 5): Common stock, par value $1.00 per share. Authorized 18,000,000 shares; issued and outstanding 3,824,305 in 1996 and 3,792,305 in 1995 3,824 3,792 Additional paid-in capital 3,425 3,219 Retained earnings 10,829 9,379 ______ ______ Total stockholders' equity 18,078 16,390 ______ ______ Commitments (note 6) $25,939 $27,355 ====== ====== See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended April 30, 1996, 1995 and 1994 (In thousands, except per share amounts) 1996 1995 1994 _______ _______ _______ Revenues $107,627 $103,028 $ 79,573 _______ _______ _______ Costs and expenses: Cost of sales 96,929 90,758 64,996 Engineering and development 1,584 2,484 3,320 Selling, general and administrative 6,661 11,451 12,682 _______ _______ _______ 105,174 104,693 80,998 _______ _______ _______ Earnings (loss) from operations 2,453 (1,665) (1,425) Other income (expense): Other income (expense), net (2) (68) 29 Interest income 41 - 16 Interest expense (100) (296) (53) _______ _______ _______ (61) (364) (8) _______ _______ _______ Earnings (loss) before income tax expense (benefit) and cumulative effect of change in accounting for income taxes 2,392 (2,029) (1,433) Income tax expense (benefit) (note 4) 942 (730) (583) _______ _______ _______ Earnings (loss) before cumulative effect of change in accounting for income taxes 1,450 (1,299) (850) Cumulative effect of change in accounting for income taxes - - 118 _______ _______ _______ Net earnings (loss) $1,450 $(1,299) $ (732) ======= ======= ======= Earnings (loss) per common share: Earnings (loss) before cumulative effect of change in accounting for income taxes .38 (.34) (.22) Cumulative effect of change in accounting for income taxes - - .03 _______ _______ _______ Net earnings (loss) per common share $ .38 $ (.34) $ (.19) ======= ======= ======= See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended April 30, 1996, 1995 and 1994 (In thousands) 1996 1995 1994 ______ _____ ______ Cash flows from operating activities: Net earnings (loss) $1,450 $(1,299) $ (732) Adjustments to reconcile net earnings (loss)to net cash provided by (used in) operating activities: Depreciation and amortization 693 876 825 Loss on disposition of property and equipment 2 162 - Bad debt expense 485 422 258 Cumulative effect of change in accounting for income taxes - - (118) Deferred income tax expense (benefit) 710 (530) (139) Write-off of inventory - 1,880 - Changes in assets and liabilities: (Increase) decrease in trade receivables 2,333 (1,753) 81 (Increase) decrease in inventories 5,749 1,866 (4,931) (Increase) decrease in income tax receivable 252 326 (1,002) Increase in other current assets (6) (39) (3) Decrease in other assets 9 6 15 Increase (decrease) in accounts payable (2,871) (1,177) 5,413 Increase (decrease) in accrued liabilities (1,021) 339 (345) Decrease in income taxes payable - - (666) _____ _____ _____ Net cash provided by (used in) operating activities 7,785 1,079 (1,344) _____ _____ _____ Cash flows from investing activities: Proceeds from sale of property and equipment 7 - - Purchase of property and equipment (270) (581) (865) _____ _____ _____ Net cash used in investing activities (263) (581) (865) Cash flows from financing activities: Purchase and subsequent cancellation of shares of common stock - (469) (59) Proceeds from sale of common shares under stock option plan (including tax benefits) 238 255 10 _____ _____ _____ Net cash provided by (used in) financing activities 238 (214) (49) _____ _____ _____ Net increase (decrease) in cash and cash equivalents 7,760 284 (2,258) Cash and cash equivalents at beginning of year 722 438 2,696 _____ _____ _____ Cash and cash equivalents at end of year $ 8,482 $ 722 $ 438 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 125 $ 258 $ 53 Income taxes 582 - 472 ===== ===== ===== Supplemental disclosures of noncash transactions: Disposal of fully-depreciated equipment $ - 348 - ===== ===== ===== See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended April 30, 1996, 1995 and 1994 (In thousands, except share amounts) Total Additional Stock- Common paid-in Retained holders' stock capital earning equity ______ ________ _______ ________ Balance at April 30, 1993 $ 3,808 $ 3,113 $11,763 $18,684 Issuance of 5,000 shares under stock option plan 5 5 - 10 Purchase and subsequent cancellation of 7,000 shares (7) (11) (41) (59) Net loss - - (732) (732) ______ ________ _______ ______ Balance at April 30, 1994 3,806 3,107 10,990 17,903 Issuance of 61,500 shares under stock option plan 61 194 - 255 Purchase and subsequent cancellation of 75,000 shares (75) (82) (312) (469) Net loss - - (1,299) (1,299) ______ ________ _______ ______ Balance at April 30, 1995 3,792 3,219 9,379 16,390 Issuance of 32,000 shares under stock option plan 32 206 - 238 Net earnings - - 1,450 1,450 ______ ________ _______ ______ Balance at April 30, 1996 $ 3,824 $ 3,425 $10,829 $18,078 ====== ======== ======= ====== See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiaries Notes to Consolidated Financial Statements April 30, 1996, 1995 and 1994 (1) Significant Accounting Policies Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Dataram International Sales Corporation (a Domestic International Sales Corporation (DISC)) and DTM Development Corporation. DTM Development Corporation was dissolved during 1995. All significant intercompany transactions and balances have been eliminated. Cash and cash equivalents. Cash and cash equivalents consist of unrestricted cash, and in 1996 money market preferred stock and commercial paper purchased with a maturity of three months or less. Inventory valuation: Inventories are valued at the lower of first-in first-out cost or market. Property and equipment: Property and equipment is recorded at cost. Depreciation is generally computed on the straight-line basis. Depreciation rates are based on the estimated useful lives 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. Revenue recognition: Revenue from product sales is recognized when the related goods are shipped to the customer and all significant obligations of the Company have been satisfied. Estimated warranty costs are accrued. Product development and related engineering: The Company expenses product development and related engineering costs as incurred. Engineering effort is directed to development of new or improved products as well as ongoing support for existing products. Income taxes: Effective May 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (Statement 109), "Accounting for Income Taxes" and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1994 consolidated statement of operations. Statement 109 requires a change from the deferred method of accounting for income taxes under APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 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. 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 Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income 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. 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 and, generally, requires no collateral from its customers. Earnings (loss) per share: Earnings (loss) per common and common equivalent share are based on the weighted average number of shares outstanding and equivalent shares from dilutive stock options. In 1995 and 1994, the calculation was based solely on weighted average number of shares outstanding, as all options were anti-dilutive. The determination of such shares used in the computation of per share data is as follows: Weighted Equivalent average number shares of shares from dilutive Total outstanding stock options shares ______________ _____________ __________ 1996 3,816,261 19,097 3,835,358 1995 3,796,526 - 3,796,526 1994 3,806,291 - 3,806,291 Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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: Statement of Financial Accounting Standards SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. 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 options: In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-based Compensation." This statement requires companies to make pro forma disclosures in a footnote of net income as if the fair value based method of accounting for stock options, as defined in the statement, had been applied. The accounting requirements of this statement are effective for transactions entered into during 1996 and ensuing years. However, the footnote disclosure requirement does not begin until 1997, at which time the disclosure will present information on a comparative basis. Management believes that the adoption of this pronouncement will not have a material effect on the consolidated financial statements. Reclassification Certain amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform to the 1996 presentation. (2) Long-term Debt Through October 26, 1994, the Company had a revolving credit facility with a bank which provided for borrowings up to $10,000,000. On October 27, 1994, the Company terminated that agreement and entered into a credit agreement with another bank for a three year $ 10,000,000 revolving credit facility and a $3,500,000 term loan facility. Borrowings under the term loan facility must be repaid in equal installments for a term of no longer than 60 months from the respective term loan date or may be prepaid without penalty. The agreement provides for Eurodollar rate loans, CD rate loans and base rate loans at an interest rate no higher than the bank's base commercial lending rate less 1/2%. The Company is required to pay a commitment fee equal to 1/16 of one percent per annum on the unused commitment. The agreement contains certain restrictive financial covenants including a minimum current ratio, minimum tangible net worth requirement, minimum interest coverage ratio, maximum debt to equity ratio and certain other covenants, as defined by the agreement. On April 28, 1995 the Company amended and restated its credit facility with its bank dated October 27, 1994. Under the amended agreement the Company reduced the term loan facility to $1,500,000 and modified certain financial covenants. The maximum and average balances outstanding at any time during 1996 were $5,500,000 and $1,200,000, respectively. The maximum and average balances outstanding at any time during 1995 were $7,200,000 and $3,800,000, respectively. The average interest rate was 8% and 7.8% in fiscal years 1996 and 1995, respectively. As of April 30, 1996 and 1995, there were no amounts outstanding under these credit facilities. As of April 30, 1996, the amounts available for borrowing under the revolving credit facility and term loan facility were $10,000,000 and approximately $1,000,000, respectively. (3) Restructuring In Fiscal years 1995 and 1994, the Company restructured certain aspects of its business. During the fourth quarter of 1995, the Company announced the phase-out of its storage product line. In connection with this phase-out, the Company recorded a $3,132,000 pre-tax charge to 1995 operations consisting of approximately: (1) $1,880,000 write-off of inventory; (2) $640,000 in severance and other costs related to employee termination; (3) $162,000 for disposal of machinery and equipment related to the storage product line; and (4) $450,000 in accruals for estimated net returns, warranty obligations, and other costs. These charges are included in cost of sales, engineering and development, selling, general and administrative, and other expense in the accompanying 1995 consolidated statement of operations and aggregated approximately $2,336,000, $150,000, $484,000 and $162,000, respectively. As of April 30, 1995, the Company had accrued approximately $1,090,000 for probable future cash expenditures related to the discontinued storage product line (of which none were paid as of April 30, 1995). All amounts accrued as of April 30, 1995 were paid out or otherwise satisfied during fiscal 1996. During the third quarter of 1994, as a result of changes in the computer memory industry, the Company initiated a plan to reduce future operating costs through human resource and facility restructuring. In connection with this plan, the Company recorded a $1,213,000 pretax charge to 1994 operations consisting of: (1) $836,000 of estimated costs relating to the Company's human resource restructuring program; (2) $300,000 write-off of inventory associated with the discontinuance of sub-contract manufacturing at one facility; (3) $22,000 provision for equipment relating to discontinued products; and (4) $55,000 for other restructuring related charges. Restructuring charges are included in cost of sales, engineering and development, and selling, general and administrative in the accompanying 1994 consolidated statement of operations and aggregated $698,000, $182,000 and $333,000, respectively. As of April 30, 1994, the Company had accrued approximately $182,000 for probable future cash expenditures and had made payments of approximately $709,000 of cash in 1994 related to the aforementioned restructuring plan. The Company completed its human resource and facility consolidation program in fiscal 1995, which resulted in the payment of substantially all of the amounts accrued for as of April 30, 1994. (4) Income Taxes Income tax expense (benefit) for the years ended April 30 consists of the following: (In thousands) 1996 1995 1994 ____ ____ ____ Current: Federal $ 232 $ (200) $ (444) State - - - ____ ____ ____ 232 (200) (444) ____ ____ ____ Deferred: Federal 598 (474) (54) State 112 (56) (85) ____ ____ ____ 710 (530) (139) ____ ____ ____ Total expense (benefit) $ 942 $ (730) $ (583) ==== ==== ==== The actual income tax expense (benefit) differs from "expected" tax expense (benefit) (computed by applying the U. S. corporate tax rate of 34% to earnings (loss) before income taxes) as follows: (In thousands) 1996 1995 1994 ____ ____ ____ Computed "expected' tax expense (benefit) $ 813 $ (690) $ (487) State income taxes (benefit) (net of Federal income tax benefit) 74 (37) (56) Dividend exclusion - - (4) Other 55 (3) (36) ____ ____ ____ $ 942 $ (730) $ (583) ==== ==== ==== 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) 1996 1995 ____ ____ Deferred tax assets: Compensated absences, principally due to accrual for financial reporting purposes $ 73 $ 81 Accounts receivable, principally due to allowance for doubtful accounts 316 198 Inventories, principally due to reserve for obsolescence and additional costs inventoried for tax purposes pursuant to Tax Reform Act of 1986 - 207 Net operating loss carryforwards 80 514 ____ ____ Total gross deferred tax assets 469 1,000 Less valuation allowance - - ____ ____ Net deferred tax assets 469 1,000 ____ ____ Deferred tax liabilities: Investment in wholly-owned subsidiary, principally due to unremitted earnings of DISC (663) (663) Property and equipment, principally due to differences in depreciation (33) (74) Other (313) (93) ____ ____ Total gross deferred tax liabilities (1,009) (830) ____ ____ Net deferred tax assets (liabilities) $(540) $ 170 ==== ==== As of April 30, 1996, the Company has net operating loss carryforwards for state income tax purposes of approximately $1,500,000, which expire through the year 2001. (5) Stock Option Plans During 1982, the Company adopted an incentive stock option plan. In 1995, 1,500 options were exercised under this plan at an exercise price of $1.625 per share. As of April 30, 1996, no further options may be granted under the plan and options to purchase 6,000 shares are outstanding and exercisable at an exercise price of $3.567 per share. In September 1992, the Company adopted an 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 950,000 shares 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, 1996, 139,500 of the outstanding options are exercisable. The status of the 1992 plan for the three years ended April 30, 1996 is as follows: Options Outstanding ___________________ Price Shares per share ______ _________ Balance April 30, 1993 400,000 $ 7.125 Granted 20,000 7.125 Exercised - - Cancelled (100,000) 7.125 _______ Balance April 30, 1994 320,000 7.125 Granted - - Exercised - - Cancelled - - _______ Balance April 30, 1995 320,000 7.125 Granted 142,000 5.125-6.75 Exercised (32,000) 7.125 Cancelled (78,000) 7.125 _______ Balance April 30, 1996 352,000 $5.125-7.125 ======= ============ In March 1990, the Company granted a total of 90,000 shares of nonqualified stock options to three non-employee directors of the Company. The options were granted for the purpose of retaining the services of qualified 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 aforementioned options are exercisable at a price of $4.21 per share, the fair market value at date of grant, for a five-year period commencing at the date of grant. During 1995, 60,000 of these options were exercised and the remaining 30,000 options expired. In November 1992, the Company granted options to acquire a total of 120,000 shares to four non-employee directors of the Company. These options were 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 aforementioned options are exercisable at a price of $11.25 per share, the fair value at the date of grant, and expire five years after date of grant. Of each option 25% is first exercisable on or after the first anniversary of the date of the grant and an additional 25% on each of three succeeding anniversary dates. During 1996, 30,000 of these outstanding options were canceled in accordance with the terms of the plan. In March 1993, the Company granted an additional option to acquire 30,000 shares to an officer of the Company upon the same terms. This option was granted for the purpose of retaining the services of this officer who is not an employee of the Company. This option is exercisable at a price of $11.25 per share, which exceeded the fair value at the date of grant and expires in November 1997. At April 30, 1996, 90,000 of these outstanding options were exercisable. (6) Commitments The Company and its subsidiaries occupy various facilities and operate various equipment under operating lease arrangements. Rents charged to operations amounted to approximately $555,000 in 1996, $449,000 in 1995 and $477,000 in 1994. Minimum annual rental commitments for all noncancellable operating leases as of April 30, 1996 are approximately as follows: (In thousands) 1997 $ 594 1998 579 1999 563 2000 563 2001 281 _____ $2,580 ===== (7) Accrued Liabilities Accrued liabilities consist of the following: (In thousands) 1996 1995 ____ ____ Payrolls, including vacations $ 252 $1,084 Commissions 225 120 Other 546 665 ______ ______ $1,023 $1,869 ====== ====== (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 $127,000, $215,000 and $273,000 in 1996, 1995 and 1994, respectively. (9) Segment Information - Operations and Assets by Geographic Locations The Company operates in one business segment and develops, manufactures and markets a variety of memory systems for use with workstations, minicomputers and servers which are manufactured by various computer systems companies. Information for 1996, 1995 and 1994 about the Company's operations and identifiable assets by geographic region is as follows: (In thousands) Export ______________ 1996 United States Europe Other Consolidated _____________ ______ _____ ____________ Revenues - unaffiliated customers $76,072 $21,630 $ 9,925 $107,627 _______ _______ _______ ________ Net revenues $76,072 $21,630 $ 9,925 $107,627 ======= ======= ======= ======== Net earnings $ 1,450 ======== Identifiable assets $ 25,939 ======== (In thousands) Export ______________ 1995 United States Europe Other Consolidated _____________ ______ _____ ____________ Revenues - unaffiliated customers $78,535 $14,654 $ 9,839 $103,028 _______ _______ _______ ________ Net revenues $78,535 $14,654 $ 9,839 $103,028 ======= ======= ======= ======== Net earnings $ (1,299) ======== Identifiable assets $ 27,355 ======== (In thousands) Export ______________ 1994 United States Europe Other Consolidated _____________ ______ _____ ____________ Revenues - unaffiliated customers $59,900 $11,563 $ 8,110 $ 79,573 _______ _______ _______ ________ Net revenues $59,900 $11,563 $ 8,110 $ 79,573 ======= ======= ======= ======== Net earnings $ (732) ======== Identifiable assets $ 30,135 ======== INDEPENDENT AUDITORS' REPORT 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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended April 30, 1996. These consolidated financial statements arc 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 generally accepted auditing standards. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Princeton, New Jersey May 24, 1996 Selected Financial Data (Not covered by independent auditors' report) (In thousands, except per share amounts Years Ended April 30, 1996 1995 1994 1993 1992 ______________________ ____ ____ ____ ____ ____ Revenues $107,627 $103,028 $ 79,573 $ 58,564 $40,166 Net earnings (loss) 1,450 (1,299) (732) 3,018 3,033 Primary earnings (loss) per share .38 (.34) (.19) .76 .80 Fully diluted earnings (loss) per share .38 (.34) (.19) .76 .79 Current assets 23,735 24,710 27,027 23,784 18,523 Total assets 25,939 27,355 30,135 26,867 21,343 Current liabilities 6,932 10,649 11,487 7,085 4,648 Long-term debt 0 0 0 0 0 Total stockholders' equity 18,078 16,390 17,903 18,684 15,645 Cash dividends - - - - Note: Net loss for 1994 included income of $118,000 or $0.03 per share related to adoption of SFAS 109, Accounting for Income Taxes Quarterly Financial Data (Unaudited) (In thousands, except per share amounts) Quarter Ended ____________________________________________ Fiscal 1996 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $24,885 $32,331 $28,385 $22,026 Gross profit 3,031 3,405 1,475 2,787 Net earnings (loss) 537 708 (243) 448 Net earnings (loss) per common and common equivalent share .14 .18 (.06) .12 Fiscal 1995 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $22,163 $27,361 $26,273 $27,231 Gross profit 3,676 4,573 3,796 225 Net earnings (loss) 268 526 215 (2,308) Net earnings (loss) per common and common equivalent share .07 .14 .06 (.61) Sixteen DIRECTORS AND CORPORATE OFFICERS Directors John J. Cahill Chairman of the Board of Directors of Dataram Corporation Private Investor Robert V. Tarantino President and Chief Executive Officer of Dataram Corporation Bernard L. Riley Private Investor Richard Holzman* Private Investor Thomas A. Majewski* Principal, Walden Inc. (Venture Capital) *Member of Audit Committee Corporate Officers John J. Cahill Chairman of the Board Robert V. Tarantino President and Chief Executive 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 and Marketing Thomas J. Bitar Secretary Partner, Dillon, Bitar & Luther (Law Firm) Corporate Headquarters Dataram Corporation 186 Princeton-Hightstown Road West Windsor, NJ 08543 609-799-0071 Auditors KPMG Peat Marwick LLP Princeton, NJ General Counsel Dillon, Bitar & Luther Morristown, NJ Transfer Agent and Registrar First Union National Bank of North Carolina Shareholders Services Group 230 South Tryon Street 11th Floor Charlotte, NC 82288-1153 Stock Listing Dataram's common stock is listed on the American Stock Exchange with the trading system DTM. Annual Meeting The annual meeting of shareholders will be held on Tuesday, September 10, 1996, at 2:00 p.m. at Dataram's corporate headquarters at: 186 Princeton-Hightstown Road West Windsor Business Park West Windsor, New Jersey. 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 P.O. Box 7528 DATARAM CORPORATION CORPORATE HEADQUARTERS P.O. BOX 7528 PRINCETON, NJ 08543-7528 TELEPHONE 800-DATARAM 609-799-0071 FAX 609-799-6734 WEB SITE http://www/dataram.com [DATARAM LOGO]