[DATARAM LOGO] 1998 ANNUAL REPORT [PICTURE OF MEMORY BOARD WITH DESCRIPTION OF VARIOUS TECHNICAL FEATURES] A Closer Look At Memory. When you look at a memory board you usually see a small, rather modest looking device with some neatly arranged chips on it. But this apparent simplicity is misleading. The modern high-capacity memory board like the one shown on our cover is complex and carefully designed to get the most performance and greatest reliability from one of the most valuable elements of the computer: the DRAM chip. The memory board circuitry with the DRAM chips is designed to receive programs and data from the computer bus, store them, condition them, present them to the CPU, all at the fastest possible speed and with no errors. The memory is the workhorse in a computer. It carries the heavy load. The more memory a user has, the more work they will be able to do and the more pleasant that work will be. Financial Highlights (Dollar figures in thousands, except per share amounts) Fiscal Year 1998 1997 1996 1995 _______ _______ _______ _______ Revenues $ 77,286 $ 68,980 $107,627 $103,028 Net earnings (loss) 3,722 3,769 1,450 (1,299) Net earnings (loss) per common and common share equivalent (diluted) 1.19 1.10 0.38 (0.34) Working capital 14,539 15,039 16,803 14,061 Stockholders' equity 16,968 16,286 18,078 16,390 Long-term debt 0 0 0 0 Revenue per employee $ 1,017 $ 1,437 $ 2,031 $ 920 TABLE OF CONTENTS 2 A MESSAGE FROM THE PRESIDENT 3 COMPANY PROFILE 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 FINANCIAL REVIEW 19 SELECTED FINANCIAL DATA [PICTURE OF ROBERT TARANTINO] A Message from the President I am pleased to present this report on the financial results and business activities of Dataram Corporation for fiscal 1998. Expanding Customer Base Dataram is in the forefront as the "first to market" independent manufacturer of high performance memory for computer workstations and network servers. In fiscal 1998, we successfully met the challenge inherent in a very competitive memory marketplace, growing profitably, while making essential investments to insure our future growth. We committed considerable resources to strengthen our sales team, manufacturing and distribution capabilities. We have improved the effectiveness and scope of our sales force by adding skilled professionals who are servicing new and existing customers in the United States, Western Europe and Asia. Capitalizing on our reputation as a reliable, quality supplier of computer memory for more than three decades, we were able to significantly expand our customer base in both domestic and foreign markets. We take pride in our ability to ship products to customers the same day of their order. Our distribution facility, established this year in the United Kingdom, insures that European customers will receive service rivaling that given their American counterparts. Multi-task, business and engineering oriented software, which requires increasing amounts of memory to operate productively is driving the enormous demand for cost-efficient memory in computer workstations and network servers. In the Forefront of Memory Technology We improved revenues in fiscal 1998 by achieving substantial volume increases, thereby overcoming the declining cost of DRAM chips which lowered product selling prices. We reinforced our commitment to our automated manufacturing facility, expanding capacity and fine tuning production lines to accommodate the unit volume increase. Since 1995, we have invested approximately $5 million in capital equipment which has improved production efficiencies helping us to increase operating margins. Dataram has long enjoyed a reputation for exceptional product quality and new product development excellence. We are committed to continuing our investment in manufacturing technology and product development to maintain our competitive advantage. A Profitable Future The investments we are making will provide sustained profitable results. There are several reasons for our positive outlook: 1. Volume Growth to Continue. We anticipate that demand for our products will accelerate as Internet business applications continue to grow. Agreements signed with Sun Microsystems and Silicon Graphics - giving Dataram "licensed manufacturer" status - - will generate increased demand for our products in these markets. 2. Infrastructure is Solid. Strategic Additions to our team - supported by ongoing capital investments - has enhanced our marketing, selling, manufacturing and engineering capabilities. These capabilities will provide a solid foundation for our profitable growth. 3. Strong Financial Condition. With a reputation for financial strength and fiscal responsibility, we have financed all capital requirements from operation cash flow. The Company has no long- term debt, with sufficient leverage to comfortably finance our plans. For these important reasons, we confidently anticipate a strong fiscal 1999. July 14, 1998 Robert V. Tarantino President and Chief Executive Officer Company Profile [PICTURE OF PICK AND PLACE MACHINE PLACING COMPONENTS ON A MEMORY BOARD] Introduction Dataram creates and markets computer memory upgrade products to a global market of advanced workstation and network server users. Our products increase the performance of virtually all Compaq, Digital, Hewlett-Packard, IBM, Silicon Graphics and Sun Microsystems workstation and network server platforms by providing high-quality memory at prices significantly lower than the computer manufacturers. Our products are in every way similar to the original equipment manufacturers in form, fit and function. The high quality and value advantage we offer has earned us a reputation as an excellent company supplying a product of critical importance to our customers for more than 30 years. We are a quality and service oriented company supporting our customers throughout the world in diverse productive enterprises including engineering and manufacturing, business and finance, science and education, government and utilities, and arts and entertainment. In these areas and others we help increase group and individual productivity. The Computer Industry and Dataram Dataram's 30+ years of success and growth is grounded in solid engineering, quality-oriented manufacturing, the highest possible level of customer service, value pricing and the maintenance of a solid corporate financial condition. All of these are integrated into a vision that recognizes the nature of the computer revolution and the contemporary computer industry. From that vision, we have positioned ourselves as a significant strategic resource to an important market sector that will grow strongly for the next decade and beyond. Dataram's strength is our ability to acknowledge the volatility in our industry and to take creative steps to profit from what it offers us. At Dataram we know the difficult truth that any of our hard-won advantages and our most treasured strengths can become liabilities. We constantly assess our ideas and our resources for their relevance to tomorrow's Dataram, not today's. Doing the Fundamentals Right The one constant in what we do and the source of our ability to respond is a concentration on the fundamentals. For us, the first fundamental is maintaining a powerful and flexible engineering team. Our engineering asset is the very best, creating advanced memory products for the finest enterprise-wide computer-based information and production infrastructures in the world. Dataram engineering designs superior [PICTURE OF FINISHED PRODUCT BEING INSPECTED] [PICTURE OF COMPONENTS BEING INSPECTED] memory-in form, fit and function every bit and byte as good as the original equipment version. Radical changes in the state of the memory art and rapidly emerging technical trends are what we thrive on; that's where we find our opportunities. Powerful, flexible Dataram engineering responds with quality and speed so we can be the first to provide our customers with an affordable upgrade they can count on. Our second fundamental is service and support. We saw early that cost reductions and technical advancement in telecommunications, the spread of computer-based high-definition communications media such as the Internet, the burgeoning package shipping industry and the heightened service expectations of customers throughout the world would provide a competitive opportunity for us. We've capitalized on that opportunity with a fully developed and constantly evolving customer service and support infrastructure that includes: direct and immediate telephone access to memory and service consultants, a family of worldwide distributors, the creation of a European distribution center, a record of 97% for shipment of product within 24 hours of order, a lifetime guarantee and an internet-based Virtual Sales Office for direct ordering and tracking every hour of every day. Our third fundamental is the maintenance of a strong corporate financial condition, one achieved through prudent investment in our operating infrastructure, the avoidance of debt and the resolve to make whatever changes in human or material resources are required to remain healthy and grow. Our financial condition is itself a strategic resource that gives substance to all that we do. It lets us take advantage of important opportunities such as new demand, whether created by emerging products among manufacturers for whom our products are designed or by emerging and maturing market sectors. Financial health lets us defend against the hazards that are a natural part of our business environment and our position as a midsize company among larger companies. Financial health lets us develop and maintain economically favorable relationships with suppliers, financial institutions and the business community in general. It helps us attract skilled and motivated staff at every level of the company. It supports thorough and confident implementation of our short-range and long-range plans. Our financial condition is the corporate "fitness" that enables us to chase down opportunity and escape adversity. [PICTURE OF STENCIL PRINTER] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Dataram is a developer, manufacturer and marketer of quality memory products for use with computer workstations and network servers. The Company's memory products, principally for workstations and servers manufactured by Sun Microsystems, Hewlett-Packard, Digital Equipment Corporation, Silicon Graphics, IBM, and COMPAQ are sold worldwide to distributors, value-added resellers and end users. 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 are dynamic random access memory (DRAM) chips. The purchase cost of DRAM chips typically represents approximately 85% of the total cost of a finished workstation 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, 1998 1997 1997 _____________________ ____ ____ ____ Revenues 100.0% 100.0% 100.0% Cost of sales 75.8 78.9 90.0 _____ ______ _____ Gross profit 24.2 21.1 10.0 Engineering and development 1.5 1.5 1.5 Selling, general and administrative 15.2 11.1 6.2 _____ ______ _____ Earnings from operations 7.5 8.5 2.3 Other income (expense), net 0.3 0.3 (0.1) _____ ______ _____ Earnings before income tax expense 7.8 8.8 2.2 Income tax expense 3.0 3.4 0.9 _____ ______ _____ Net earnings 4.8 5.4 1.3 ===== ====== ====== Fiscal 1998 Compared With Fiscal 1997 During fiscal 1998 DRAM chips continued to dramatically decline in price. At the beginning of the fiscal year, 64 megabit and 16 megabit DRAMs cost approximately $48 and $8, respectively. By the end of the year these same DRAMs were approximately $10 and $2. As a result of this decline and the competitive nature of the industry, average selling prices for most of the Company's products have declined commensurately. However, unit volume measured as gigabytes shipped has offset the selling price decline. Workstation and server users are increasingly purchasing larger capacity memory boards based on 64 megabit DRAM technology as these products have become more cost effective. Revenues in 1998 totaled $77.3 million, an increase of 12% from 1997 revenues of $69.0 million. The increase in fiscal 1998 was the result of increased unit volume offset by reduced average selling prices. In fiscal 1998, the Company implemented a planned expansion of its domestic and international sales force. This enhanced resource has led to an expanded customer base and increased volume. As in prior years, the majority of the Company's revenues have been generated by products designed for SUN, Hewlett-Packard and DEC platforms. In fiscal 1998, the Company entered into a licensing agreement with Silicon Graphics, Inc. which has resulted in increased revenue generated by products designed for that market. In the fourth quarter of fiscal 1998, the Company entered into a licensing agreement with Sun Microsystems, Inc. which allows the Company to use Sun's patented memory module technology. In fiscal 1998, approximately 71% of revenues were derived from domestic sales, 19% from sales into Europe, with the majority of the remaining sales coming from Pacific Rim countries. Cost of sales increased $4.2 million in fiscal 1998 from fiscal 1997. However, cost of sales as a percentage of revenue decreased by 3.1% in fiscal 1998 from fiscal 1997. The decrease in percentage is primarily attributable to a decision made by the Company in the beginning of fiscal 1998 to focus exclusively on higher capacity memory products which command higher margins. Engineering and development costs amounted to $1.1 million and $1.0 million in 1998 and 1997, respectively. The Company intends to maintain its commitment to timely introduction of new memory products. Selling, general and administrative costs were $11.8 million in fiscal 1998 versus $7.7 million in fiscal 1997. In fiscal 1998, the Company incurred approximately $2.0 million in legal expenses associated with a previously announced complaint filed by Sun Microsystems, Inc. Prior year expenses related to this matter totaled approximately $400,000. The litigation was resolved in fiscal 1998 and all expenses associated with the litigation have either been paid or accrued as of the end of fiscal 1998. The remainder of the year over year increase is primarily the result of the previously mentioned expansion of the Company's sales force. Other income, net totaled $268,000 and $227,000 in 1998 and 1997, respectively. Other income in both years consists primarily of net interest income. Fiscal 1997 Compared With Fiscal 1996 Fiscal 1997 was a year characterized by the continued rapid decline in DRAM prices. The primary memory chip used in the Company's products during the fiscal year was the 16 megabit DRAM. At the beginning of the year, these chips cost approximately $25 each. By the fourth quarter of the fiscal year, they were generally available at less than $8 each. As a result of competitive pressures in the industry, average selling prices for the Company's products declined throughout the year generally in line with the decline in DRAM prices. However, lower pricing for memory products resulted in a significant increase in unit demand. During the second half of fiscal 1997, the Company started producing workstation products incorporating the next generation of DRAMs, 64 megabit. Revenues in 1997 totaled $69.0 million, a decrease of 36% from 1996 revenues of $107.6 million. As discussed, the decline in revenues in fiscal 1997 was the result of declining average selling prices for the Company's products offset by increased unit shipments. Revenues from the sale of products for Sun and Hewlitt-Packard workstations and computers were the leading contributors totaling 71.3% of revenues. Cost of sales decreased $42.5 million in fiscal 1997 from fiscal 1996. Cost of sales as a percentage of revenues decreased by 11.1% in fiscal 1997 from fiscal 1996. With the change in the DRAM market, vendors could no longer charge independent memory manufacturers premiums to what the original equipment manufacturers were being charged for DRAMs. Engineering and development costs amounted to $1.0 million in 1997, a decrease of $0.6 million from fiscal 1996 expenditures of $1.6 million. Selling, general and administrative costs were $7.7 million in fiscal 1997 versus $6.7 million in fiscal 1996. In fiscal 1997, the Company incurred increased legal expenses associated with a previously announced complaint filed by Sun Microsystems, Inc. as well as planned increases in marketing and promotional expenditures. Other income, net totaled $227,000 in 1997 versus other expense, net of $61,000 in 1996. Fiscal 1997 other income consists primarily of net interest income and fiscal 1996 expense consists primarily of net interest expense. Liquidity and Capital Resources During fiscal 1998 the Company purchased and retired 335,000 shares of its common stock at a total price of $3.3 million financed entirely by operating earnings. Working capital at the end of fiscal 1998 amounted to $14.5 million, including cash and cash equivalents of $7.5 million, compared to working capital of $15.0 million, including cash and cash equivalents of $6.8 million in fiscal 1997. Current assets at year end were 3.2 times current liabilities compared to 3.9 at the end of fiscal 1997. Inventories at the end of fiscal 1998 were $2.9 million compared to fiscal 1997 year-end inventories of $4.4 million. Currently, DRAMs remain readily available and the Company maintains only the required level of inventory necessary to support its customer base. At the end of fiscal 1997, the price of DRAMs increased and the Company temporarily elected to increase its inventory commitment. Capital expenditures were $1,966,000 in fiscal 1998 compared to $650,000 in fiscal 1997. Capital expenditures in both years included approximately $200,000 for leasehold improvements and facility renovation. Subsequent to the end of the fiscal year, approximately $515,000 of the capital equipment purchased for the Company's manufacturing operation in fiscal 1998 was placed on an operating lease, which is consistent with prior year's practices. Remaining fiscal 1998 and fiscal 1997 capital expenditures were primarily for automated testing equipment and management information systems upgrades. At the end of fiscal 1998, contractual commitments for capital purchases were nil. Fiscal 1999 capital expenditures are not expected to exceed fiscal 1998 expenditures. The Company's products are all year 2000 compliant. The Company has reviewed its information systems and intends to complete the upgrade of any non year 2000 compliant systems in fiscal 1999. Management estimates that the financial impact of the upgrade will not have a material effect on the Company's consolidated financial condition, results of operations and liquidity. Inflation has not had a significant impact on the Company's revenue and operations. During fiscal 1998, the Company amended and restated its $12 million unsecured revolving credit line with its bank. The credit facility was unused during fiscal 1998. Annually, $6 million of the facility is scheduled to expire. The Company intends to renew any expiring portion of the facility by the expiration date and maintain a $12 million total facility. Management believes that its working capital together with internally generated funds and its bank line of credit are adequate to finance the Company's 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. 1998 1997 ___________________ __________________ High Low High Low ___________________ __________________ First Quarter 10 7/8 9 6 11/16 5 1/2 Second Quarter 10 3/8 8 1/8 8 1/8 6 1/8 Third Quarter 9 11/16 8 11 1/4 7 5/8 Fourth Quarter 12 11/16 9 13/16 11 7/8 8 1/2 At April 30, 1998 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 SUBSIDIARY Consolidated Balance Sheets April 30, 1998 and 1997 (In thousands, except share amounts) 1998 1997 ______ ______ Assets Current assets: Cash and cash equivalents $ 7,530 $ 6,836 Trade receivables, less allowance for doubtful accounts of $450 $800 in 1998 and in 1997, respectively 10,076 8,473 Inventories: Raw materials 1,759 3,369 Work in process 61 98 Finished goods 1,103 929 ______ ______ 2,923 4,396 Income tax receivable (note 3) -- 48 Deferred income taxes (note 3) 425 423 Other current assets 68 101 ______ ______ Total current assets 21,022 20,277 ______ ______ Property and equipment, at cost: Land 875 875 Machinery and equipment 8,806 6,840 ______ ______ 9,681 7,715 Less accumulated depreciation 6,246 5,461 ______ ______ Net property and equipment 3,435 2,254 Other assets 7 6 ______ ______ $24,464 $22,537 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 4,699 $ 4,145 Accrued liabilities (note 6) 1,784 1,093 ______ ______ Total current liabilities 6,483 5,238 Deferred income taxes (note 3) 1,013 1,013 ______ ______ Total liabilities 7,496 6,251 ______ ______ Stockholders' equity (note 4): Common stock, par value $1.00 per share. Authorized 18,000,000 shares; issued and outstanding 2,781,405 in 1998 and 3,077,449 in 1997 2,781 3,078 Additional paid-in capital 2,126 2,453 Retained earnings 12,061 10,755 ______ ______ Total stockholders' equity 16,968 16,286 ______ ______ Commitments and Contingencies(notes 5 and 9) $24,464 $22,537 ====== ====== See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARY Consolidated Statements of Earnings Years ended April 30, 1998, 1997 and 1996 (In thousands, except per share amounts) 1998 1997 1996 _______ _______ _______ Revenues $ 77,286 $ 68,980 $107,627 _______ _______ _______ Costs and expenses: Cost of sales 58,608 54,409 96,929 Engineering and development 1,113 1,030 1,584 Selling, general and administrative 11,766 7,674 6,661 _______ _______ _______ 71,487 63,113 105,174 _______ _______ _______ Earnings from operations 5,799 5,867 2,453 Other income (expense): Other income (expense), net 3 18 (2) Interest income 305 276 41 Interest expense (40) (67) (100) _______ _______ _______ 268 227 (61) _______ _______ _______ Earnings before income tax expense 6,067 6,094 2,392 Income tax expense (note 3) 2,345 2,325 942 _______ _______ _______ Net earnings $3,722 $3,769 $1,450 ======= ======= ======= Net earnings per common share: Basic $ 1.26 $ 1.12 $ .38 ======= ======= ======= Diluted $ 1.19 $ 1.10 $ .38 ======= ======= ======= See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended April 30, 1998, 1997 and 1996 (In thousands) 1998 1997 1996 ______ _____ ______ Cash flows from operating activities: Net earnings $3,722 $3,769 $1,450 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 785 594 693 Loss on disposition of property and equipment - - 2 Bad debt expense 435 263 485 Deferred income tax expense (benefit) (2) 50 710 Changes in assets and liabilities: (Increase) decrease in trade receivables (2,038) 3,342 2,333 (Increase) decrease in inventories 1,473 (2,084) 5,749 Decrease in income tax receivable 48 376 252 (Increase) decrease in other current assets 33 (51) (6) (Increase) decrease in other assets (1) - 9 Increase (decrease) in accounts payable 554 (1,764) (2,871) Increase (decrease) in accrued liabilities 691 70 (1,021) _____ _____ _____ Net cash provided by operating activities 5,700 4,565 7,785 _____ _____ _____ Cash flows from investing activities: Proceeds from sale of property and equipment - - 7 Purchase of property and equipment (1,966) (650) (270) _____ _____ _____ Net cash used in investing activities (1,966) (650) (263) _____ _____ _____ Cash flows from financing activities: Purchase and subsequent cancellation of shares of common stock (3,318) (5,671) - Proceeds from sale of common shares under stock option plan (including tax benefits) 278 110 238 _____ _____ _____ Net cash provided by (used in) financing activities (3,040) (5,561) 238 _____ _____ _____ Net increase (decrease) in cash and cash equivalents 694 (1,646) 7,760 Cash and cash equivalents at beginning of year 6,836 8,482 722 _____ _____ _____ Cash and cash equivalents at end of year $ 7,530 $ 6,836 $ 8,482 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 52 $ 43 $ 125 Income taxes $ 2,033 $ 1,881 $ 582 ===== ===== ===== See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended April 30, 1998, 1997 and 1996 (In thousands, except share amounts) Total Additional stock- Common paid-in Retained holders' stock capital earning equity ______ ________ _______ ________ Balance at April 30, 1995 $3,792 $3,219 $9,379 $16,390 Issuance of 32,000 shares under stock option plans 32 206 - 238 Net earnings - - 1,450 1,450 ______ ________ _______ ______ Balance at April 30, 1996 3,824 3,425 10,829 18,078 Issuance of 19,000 shares under stock option plans 19 91 - 110 Purchase and subsequent cancellation of 765,856 shares (765) (1,063) (3,843) (5,671) Net earnings - - 3,769 3,769 ______ ________ _______ ______ Balance at April 30, 1997 3,078 2,453 10,755 16,286 Issuance of 39,000 shares under stock option plans 39 239 - 278 Purchase and subsequent cancellation of 335,044 shares (336) (566) (2,416) (3,318) Net earnings - - 3,722 3,722 ______ ________ _______ ______ Balance at April 30, 1998 $ 2,781 $ 2,126 $12,061 $16,968 ====== ======== ======= ======= See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements April 30, 1998, 1997 and 1996 (1) Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Dataram International Sales Corporation (a Domestic International Sales Corporation (DISC)). All significant intercompany transactions and balances have been eliminated. Cash and cash equivalents Cash and cash equivalents consist of unrestricted cash, money market preferred stock and commercial paper with original maturities of three months or less. Inventory valuation Inventories are valued at the lower of cost or market, with costs 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 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. 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 The Company follows the asset and liability method of accounting for income taxes in accordance with the provisions of Statement of Financial Accounting Standards 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. 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. 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. Net earnings per share In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". SFAS 128 establishes standards for computing and presenting earnings per share and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Accordingly, the accompanying net earnings per share information has been calculated and presented in accordance with the provisions of SFAS 128. Basic net earnings per share was calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share 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). The following presents a reconciliation of the numerator and denominator used in computing Basic and Diluted net earnings per share: (Earnings in thousands) Year ended April 30, 1998 ___________________________________ Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 3,722 2,958,015 $ 1.26 Effect of dilutive securities - -stock options - 160,310 _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 3,722 3,118,325 $ 1.19 ======= ========= ====== Year ended April 30, 1997 ___________________________________ Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 3,769 3,360,975 $ 1.12 Effect of dilutive securities - -stock options - 71,286 _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 3,769 3,432,261 $ 1.10 ======= ========= ====== Year ended April 30, 1996 ___________________________________ Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 1,450 3,816,261 $ 0.38 Effect of dilutive securities - -stock options - 16,354 _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 1,450 3,832,615 $ 0.38 ======= ========= ====== 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 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. Impairment of long-lived assets and long lived-assets to be disposed of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", requires that long-lived assets and certain identifiable intangibles be 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 future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement has had no material impact on the Company's financial position, results of operations, or liquidity. Accounting for stock based compensation SFAS No. 123, "Accounting for Stock-based Compensation", requires companies to make pro forma disclosures in a footnote of net earnings 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 (see note 4). Impact of Recent Accounting Standards In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS 130 establishes standards for the reporting and display of comprehensive earnings in the financial statements. Comprehensive earnings is the total of net earnings and all other non-owner changes in equity. SFAS 131 requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. SFAS 130 and 131 are effective for fiscal 1999. Adoption of these standards is expected to result in additional disclosures, but will not have an effect on the Company's consolidated financial position or results of operations. (2) Long-Term Debt On November 1, 1997, the Company amended and restated its credit facility with its bank. Under the amended agreement, the Company modified certain financial covenants and increased its revolving credit facility to $12,000,000 until October 31, 1998, at which point it will decrease to $6,000,000 until October 31, 1999. 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. There were no borrowings during fiscal 1998 and 1997. The maximum and average balances outstanding at any time during fiscal 1996 were $5,500,000 and $1,200,000, respectively. The average interest rate was 8% in fiscal year 1996. As of April 30, 1998, the amount available for borrowing under the revolving credit facility was $12,000,000. (3) Income Taxes Income tax expense for the years ended April 30 consists of the following: (In thousands) 1998 1997 1996 _____ _____ _____ Current: Federal $ 1,889 $ 1,889 $ 232 State 458 386 - _____ _____ _____ 2,347 2,275 232 _____ _____ _____ Deferred: Federal (1) (26) 598 State (1) 76 112 _____ _____ _____ (2) 50 710 _____ _____ _____ Total income tax expense $ 2,345 $ 2,325 $ 942 ===== ===== ===== The actual income tax expense differs from "expected" tax expense (computed by applying the U. S. corporate tax rate of 34% to earnings before income taxes) as follows: (In thousands) 1998 1997 1996 _____ _____ _____ Computed "expected' tax expense $ 2,063 $ 2,072 $ 813 State income taxes(net of Federal income tax benefit) 303 303 (74) Other (21) (50) 55 _____ _____ _____ $ 2,345 $ 2,325 $ 942 ===== ===== ===== 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) 1998 1997 ____ ____ Deferred tax assets: Compensated absences, principally due to accrual for financial reporting purposes $ 125 $ 88 Accounts receivable, principally due to allowance for doubtful accounts 176 312 Property and equipment, principally due to differences in depreciation 104 23 Inventory, principally due to reserve for obsolescence 20 - ____ ____ Total gross deferred tax assets 425 423 Less valuation allowance - - ____ ____ Net deferred tax assets 425 423 ____ ____ Deferred tax liabilities: Investment in wholly-owned subsidiary, principally due to unremitted earnings of DISC (663) (663) Other (350) (350) ____ ____ Total gross deferred tax liabilities (1,013) (1,013) ____ ____ Net deferred tax liabilities $(588) $(590) ==== ==== (4) Stock Option Plans During 1982, the Company adopted an incentive stock option plan. In 1997, 6,000 options were exercised under this plan at an exercise price of $3.567. No further options may be granted under the plan and there are no options outstanding under the 1982 plan. In September 1992, the Company adopted an incentive and nonstatutory 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, 1998, 239,400 of the outstanding options are exercisable. The status of the 1992 plan for the three years ended April 30, 1998 is as follows: Options Outstanding ___________________________ Exercise price Shares per share ______ _______________ 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 Granted 167,000 6.938 Exercised (13,000) 5.125-7.125 Cancelled (10,000) 7.125 ________ ____________ Balance April 30, 1997 496,000 5.125-7.125 Granted 232,000 8.438-10.75 Exercised (39,000) 7.125 Cancelled (22,000) 5.125-7.125 ________ ____________ Balance April 30, 1998 667,000 $5.125-10.75 ======== ============ The Company also grants nonqualified stock options to nonemployee 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 nonemployee directors are exercisable at a price representing the fair value at the date of grant. Of each option, 25% is first exercisable on or after the date of the grant and an additional 25% on each of three succeeding anniversary dates. At April 30, 1998, 36,000 of the outstanding options are exercisable. The status of the nonemployee director options for the three years ended April 30, 1998 is as follows: Options Outstanding ___________________________ Exercise price Shares per share ______ _______________ Balance April 30, 1995 150,000 $ 11.25 Granted _ _ Exercised - - Cancelled (30,000) 11.25 ________ ____________ Balance April 30, 1996 120,000 11.25 Granted 30,000 6.938 Exercised - - Cancelled - - ________ ____________ Balance April 30, 1997 150,000 6.938-11.25 Granted 120,000 8.438 Exercised - - Cancelled (120,000) 11. 25 ________ ____________ Balance April 30, 1998 150,000 $6.938-11.25 ======== ============ The following table summarizes information about stock options outstanding at April 30, 1998: 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, 1998 life price 1998 price ____________ ________ ___________ ________ _________ ________ $ 5.125-6.75 122,000 7.28 $ 5.66 48,800 $ 5.66 6.938-7.125 313,000 6.33 7.03 190,600 7.09 8.438-10.75 382,000 9.49 8.92 36,000 8.82 ____________ ________ ___________ _______ _________ ________ $5.125-10.75 817,000 7.95 7.71 275,400 7.07 ============ ======= ==== ==== ======= ==== The Company has adopted the disclosure-only provisions of SFAS No. 123, and applies APB Opinion 25 in accounting for its plans and, accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price at the date of the grant over the amount an employee must pay to acquire the stock. Because the Company grants options at a price equal to the market price of stock at the date of grant, no compensation expense is recorded. Had the Company determined compensation cost based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below: (In thousands, except per share amounts) 1998 1997 1996 ____ ____ ____ Net earnings as reported $ 3,722 $ 3,769 $ 1,450 Net earnings pro forma 3,517 3,667 1,418 Net earnings per share as reported: Basic 1.26 1.12 .38 Diluted 1.19 1.10 .38 Net earnings per share pro forma: Basic 1.19 1.07 .37 Diluted 1.13 1.06 .37 The pro forma amounts as noted above may not be representative of the effects on reported earnings for future years. Pro forma net earnings reflects only options granted in 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of 5 years and compensation cost for options granted prior to April 30, 1995 is not considered. The fair value of the stock options granted in 1998, 1997 and 1996 is estimated at grant date using the Black-Scholes option pricing model with the following weighted average assumptions: for 1998 - expected dividend yield 0.0%, risk free interest rate of 6.5%, expected volatility of 37%, and an expected life of 7.5 years; 1997 - expected dividend yield 0.0%, risk free interest rate of 7%, expected volatility of 41%, and an expected life of 7 years; for 1996 - expected dividend yield 0.0%, risk free interest rate of 6.5%, expected volatility of 19%, and an expected life of 7.5 years. The weighted average estimated fair value of options granted in 1998, 1997 and 1996 was $4.86, $4.14 and $2.42, respectively. (5) Commitments The Company and its subsidiary occupy various facilities and operate various equipment under operating lease arrangements. Rents charged to operations amounted to approximately $593,000 in 1998, $612,000 in 1997 and $555,000 in 1996. Minimum annual rental commitments for all noncancellable operating leases as of April 30, 1997 are approximately as follows: (In thousands) 1999 $ 761 2000 703 2001 358 2002 125 2003 - _____ $1,947 ===== During the year ended April 30, 1998, the Company signed licensing agreements with Silicon Graphics, Inc. and Sun Microsystems, Inc. (SUN) to manufacture memory upgrades for certain high performance servers and workstations. Under these agreements, the Company is obligated to pay a royalty based on sales of such products. (6) Accrued Liabilities Accrued liabilities consist of the following: (In thousands) 1998 1997 ____ ____ Payrolls, including vacations $ 474 $ 329 Commissions and bonuses 563 559 Royalties (note 5) 364 - Other 383 205 ______ ______ $1,784 $1,093 ====== ====== (7) 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 $133,000, $121,000 and $127,000 in 1998, 1997 and 1996, respectively. (8) Revenues by Geographic Location The Company operates in one business segment and develops, manufactures and markets a variety of memory systems for use with workstations and servers which are manufactured by various computer systems companies. Revenues for 1998, 1997 and 1996 by geographic region is as follows: (in thousands) Export ______ Years ended April 30, United States Europe Other Consolidated _____________ ______ _____ ____________ 1998 $54,989 $14,860 $7,437 $ 77,286 1997 50,147 12,988 5,845 68,980 1996 76,072 21,630 9,925 107,627 (9)Litigation In August 1996, SUN filed a complaint alleging patent infringement against the Company in the Federal District Court asserting the infringement of five specific patents related to single in-line memory module (SIMM) technology. In October 1996, the Company filed its answer and affirmative defenses and asserted several anti-trust and other anti-competitive counterclaims against SUN in addition to its affirmative defenses. This case was settled and dismissed with prejudice by the court in April 1998. The Company and SUN entered into a licensing and settlement agreement which resulted in resolution of all claims for damages. The license agreement provides for payment of royalties by the Company on sales of certain defined memory modules. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Dataram Corporation: We have audited the accompanying consolidated balance sheets of Dataram Corporation and subsidiary as of April 30, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended April 30, 1998. 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 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 subsidiary as of April 30, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Princeton, New Jersey May 20, 1998 Selected Financial Data (Not covered by independent auditors' report) (In thousands, except per share amounts) Years Ended April 30, 1998 1997 1996 1995 1994 ______________________ ____ ____ ____ ____ ____ Revenues $ 77,286 $ 68,980 $107,627 $103,028 $ 79,573 Net earnings 3,722 3,769 1,450 (1,299) (732) Basic earnings (loss) per share 1.26 1.12 .38 (.34) (.19) Diluted earnings (loss) per share 1.19 1.10 .38 (.34) (.19) Current assets 21,022 20,277 23,735 24,710 27,027 Total assets 24,464 22,537 25,939 27,355 30,135 Current liabilities 6,483 5,238 6,932 10,649 11,487 Long-term debt 0 0 0 0 0 Total stockholders' equity 16,968 16,286 18,078 16,390 17,903 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 1998 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $18,147 $20,068 $19,844 $19,227 Gross profit 3,512 4,665 5,153 5,348 Net earnings 669 945 1,032 1,076 Net earnings (diluted) per common and common equivalent share .21 .30 .34 .35 Quarter Ended ____________________________________________ Fiscal 1997 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $17,448 $17,168 $17,514 $16,850 Gross profit 3,560 3,835 3,570 3,606 Net earnings 964 1,014 912 878 Net earnings (diluted) per common and common equivalent share .26 .30 .27 .27 Earnings per share is calculated independently for each quarter and therefore does not equal the total for the year. DIRECTORS AND CORPORATE OFFICERS Directors Robert V. Tarantino President and Chief Executive Officer of Dataram Corporation Richard Holzman* Private Investor Thomas A. Majewski* Principal, Walden Inc. Bernard L. Riley* Private Investor Roger Cady* Principal, Arcadia Associates *Member of audit committee Corporate Officers 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 Thomas J. Bitar Secretary Partner, Dillon, Bitar & Luther 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 Customer Information Center 1525 West W.T. Harris Boulevard Building 3C3 Charlotte, NC 28288 Stock Listing Dataram's common stock is listed on the American Stock Exchange with the trading symbol DTM. Annual Meeting The annual meeting of shareholders will be held on Wednesday, September 9, 1998, at 2:00 p.m. at Dataram's corporate headquarters at: 186 Princeton-Hightstown Road West Windsor Business Park West Windsor, NJ 08543 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 Princeton, NJ 08543-7528 [PICTURE OF MEMORY BOARD WITH DESCRIPTION OF VARIOUS TECHNICAL FEATURES] Dataram Corporation Princeton, NJ 08543-7528 USA Voice: 1-609-799-0071 Fax: 1-609-799-6734 www/dataram.com