[DATARAM LOGO] DATARAM CORPORATION 1999 ANNUAL REPORT Financial Highlights (Dollar figures in thousands, except per share amounts) Fiscal Year 1999 1998 1997 1996 _______ _______ _______ _______ Revenues $ 75,853 $ 77,286 $ 68,980 $ 107,627 Net earnings 5,635 3,722 3,769 1,450 Net earnings per common and common share equivalent (diluted) .90 .60 .55 .19 Working capital 17,438 14,539 15,039 16,803 Stockholders' equity 20,019 16,968 16,286 18,078 Long-term debt 0 0 0 0 Table of Contents 2 A Message from the President 3 Company Profile 7 Management's Discussion and Analysis of financial Condition and results of Operations 10 Financial Review 21 Selected Financial Data 1 [PICTURE OF ROBERT TARANTINO] TO OUR SHAREHOLDERS It is with great excitement that I come to you this year to report on our Company's performance in fiscal 1999 and our plans and outlook for the future. Dataram Corporation benefited from a number of positive factors in fiscal 1999, including the explosive growth of the Internet and the continued rapid growth in the installed base of network servers and workstations in companies that track airline reservations, create Hollywood special effects, execute stock transactions, support communications activity, utility transmission, research programs and a host of other memory intensive applications. The Company's net earnings increased by 51 percent for fiscal 1999 to $5,635,000, or $.90 per diluted share, from $3,722,000, or $.60 per diluted share for fiscal 1998. We accomplished this despite the fact that our revenues for fiscal 1999 were off slightly as a result of lowered product selling prices resulting from the declining cost of DRAM chips. Fiscal 1999 revenues were $75.9 million versus $77.3 million for the prior fiscal year. Gross margins for fiscal 1999 were 28 percent, a four-percentage- point increase over the prior year. Our ability to increase our profitability in an environment of declining selling prices underscores the soundness of our growth strategy and the reputation and quality of our products. DRAM chip prices are certainly important to our business, but they are not everything. Rather than concentrating our efforts on an area over which we had no control, we continued to improve our company from within by increasing our business with existing customers, expanding our customer base, broadening our product line and launching a new growth initiative to supply high performance, Intel certified memory to the Original Equipment Manufacturers (OEM) market. As a result, our sales volume, measured by gigabytes shipped, increased 95 percent in fiscal 1999. The burgeoning growth of the Internet has created great demand for the type of memory products we produce. High performance memory is the key to fast Internet response, which is increasingly in demand as e-commerce and Internet data dissemination continue to expand. It is a tremendously exciting part of our business that we expect will continue to fuel our growth and provide our shareholders with greater value and a profitable way to participate in the growth of the Internet. Additionally, by establishing a presence in the OEM marketplace, we are adhering to our strategy of continuing to grow our core memory business while expanding into new markets. In order to build this new segment of our business, we appointed Jay Litus to the position of Vice President of Business Development. Mr. Litus, who has more than 15 years of relevant executive level experience, is responsible for developing strategic business partnerships with OEMs. Already, we have secured relationships with two important new customers. We look forward to continued progress in this area. We see significant investment value in Dataram, knowing the substantial growth opportunities that lie ahead for us. In recognition of this, the Company's Board of Directors enacted a 500,000 share repurchase program in fiscal 1999, which was later expanded to include an additional 500,000 shares. The Board also approved a two-for-one stock split during fiscal 1999 to improve liquidity for our shares. We believe that, together, these actions benefit our shareholders by enhancing the value of our stock. We would like to take this opportunity to thank our shareholders and the investment community for their continued support, and to express our appreciation to our employees, whose hard work and dedication enable us to continuously reach and meet higher goals. July 15, 1999 Robert V. Tarantino Chairman of the Board of Directors, President and Chief Executive Officer "net earnings increased by 51 percent for fiscal 1999" 2 Company Profile INTRODUCTION Dataram is a leading independent manufacturer of gigabyte capacity memory products for workstations and network servers. Our products increase the performance and extend the useful life of computers manufactured by COMPAQ/Digital, Dell, Hewlett- Packard, IBM, Silicon Graphics and Sun Microsystems. Additionally, the Company manufactures and markets a line of high capacity Intel certified memory products for sale to original equipment manufacturers and channel assemblers. Our products are sold worldwide to distributors, value-added resellers and large end users. QUALITY PRODUCTS FUEL OUR ENGINE Dataram's dedication to creating the highest quality performance- enhancing products for advanced workstations and network server users has enabled us to build a strong customer base in a variety of industries throughout the world, including engineering, manufacturing, business, finance, science, education, government, utilities, and arts and entertainment. Our value advantage lies in our consistent product quality, unparalleled service and support, and the ability to offer our products at a price significantly lower than the computer manufacturers. Our memory products achieve the same high level of form, fit and function as the original equipment versions and are backed by a lifetime guarantee and incomparable service. 3 Dataram has earned a reputation over the past 32 years for being first to market with products that keep pace with the computer industry's latest innovations. In fiscal 1999, we introduced more than 70 new memory products, including a line of products for the Original Equipment Manufacturing (OEM)/channel assembler market, which allows us not only to establish relationships with new customers, but also expand relationships with our existing customers. We believe that we will be able to grow this part of our business considerably over the next few years. Although our Company has enjoyed consistent increases in the demand for its products, we have recently been experiencing a surge in orders from Internet-related companies. The dramatic growth of the Internet has greatly benefited us and will, we believe, continue to do so as the ranks of Internet users and the memory demands of online companies keep increasing. 4 SERVICE AND SUPPORT KEEP THE WHEELS ROLLING In order to establish and maintain strong, healthy relationships with our customers, we are committed to providing them with the highest level of customer service and support and to constantly develop new, innovative ways to serve them better. To deliver on that mandate, Dataram offers its customers a number of thoughtfully designed necessities and conveniences that add value to their product purchases. A customer interested in our products can shop, place or track an order anytime of the day or night on our Web site, www.dataram.com. Regardless of the application, all of our products are backed by a lifetime guarantee. We ship nearly all orders within hours of when they are received. Polite and professional memory and service consultants are available to provide direct and immediate help to customers around the clock, without ever subjecting them to a lengthy, time-wasting waiting period. As we look ahead, we feel confident that Dataram will continue to surpass its customers' expectations, not merely for product quality, but for order fulfillment and delivery, and helpfulness and professionalism. LAYING DOWN THE TRACKS FOR FUTURE GROWTH As the Internet continues to revolutionize the way people live, learn and do business, Dataram will remain prepared to supply the increasing amounts of memory needed to keep the Internet moving forward. As important as the Internet is, it is not the only driver of our business. Corporations continue to demand ever increasing amounts of our product as they expand their internal networks. Complex software introductions drive users to maximize the memory content of their workstations and servers. Finally, the constantly changing technology in the industry continues to provide us with new opportunities. Dataram is poised to benefit from this increasing demand, because of its financial strength. We have no long-term debt, a strong cash position, and a track record of profitability. Moreover, we have been around for more than three decades and have established a strong reputation for quality, value and service. 5 In addition to our financial strength and reputation, Dataram's sales model gives us an important edge in the memory business. Because we are committed to growing revenues, we have expanded our sales force and plan to continue this expansion in the upcoming fiscal year. This highly trained sales force produces tangible benefits and superior results. The number of gigabytes sold per employee rose in fiscal 1999 and we have increased both the quantity and quality of our customer relationships. Our sales force is centrally located in Princeton, New Jersey. By having a centralized sales team, we assure our customers of prompt and professional attention 24 hours a day. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Dataram is a developer, manufacturer and marketer of large capacity memory products for use with computer workstations and network servers. The Company's products help powerful computers provide internet services, track airline reservations, create Hollywood special effects, execute stock transactions, support communications activity, utility transmission, research programs and a host of other memory intensive applications. The Company's memory products, principally for workstations and servers manufactured by Sun Microsystems, Hewlett-Packard, COMPAQ/Digital, Silicon Graphics, IBM and Dell are sold worldwide to distributors, value-added resellers and end users. The Company is an independent memory manufacturer 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 80% of the total cost of a finished server or 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, 1999 1998 1997 _______________________________________________________________ Revenues 100.0% 100.0% 100.0% Cost of sales 72.3 75.8 78.9 _____ ______ _____ Gross profit 27.7 24.2 21.1 Engineering and development 1.8 1.5 1.5 Selling, general and administrative 14.6 15.2 11.1 _____ ______ _____ Earnings from operations 11.3 7.5 8.5 Other income (expense), net 0.6 0.3 0.3 _____ ______ _____ Earnings before income taxes 11.9 7.8 8.8 Income tax expense 4.4 3.0 3.4 _____ ______ _____ Net earnings 7.5 4.8 5.4 ===== ====== ====== Fiscal 1999 Compared With Fiscal 1998 Revenues in fiscal 1999 totaled $75.9 million, a decrease of 2% from fiscal 1998 revenues of $77.3 million. Unit volume measured as gigabytes shipped increased by approximately 95% in fiscal 1999 over fiscal 1998 levels. However, the Company's average selling price per gigabyte declined by approximately 53% in fiscal 1999 from fiscal 1998. The decline in selling prices was industry wide and was the result of the continued reduction in the purchase cost of DRAMs. The majority of the Company's revenues continue to be generated by products designed for SUN, Hewlett-Packard, Silicon Graphics, and COMPAQ/Digital platforms. Additionally, in the third quarter of fiscal 1999, the Company began producing products for sale to channel assemblers and original equipment manufactures. In fiscal 1999, approximately 74% of revenues were derived from domestic sales, 18% from sales into Europe, with the majority of the remaining sales coming from Pacific Rim countries. Cost of sales decreased $3.8 million in fiscal 1999 from fiscal 1998. Cost of sales as a percentage of revenue decreased by 3.5% in fiscal 1999 from fiscal 1998. The decrease in percentage is primarily attributable to a favorable product mix resulting from the Company's continued focus on higher capacity memory products which command higher margins. Engineering and development costs amounted to $1.4 million and $1.1 million in fiscal 1999 and 1998, respectively. The Company has increased its engineering resources to maintain the timely introduction of new products. Selling, general and administrative costs were $11.1 million in fiscal 1999 versus $11.8 million in fiscal 1998. In fiscal 1999, The Company continued to expand its sales force and increase marketing efforts. The increase in investment in these areas was offset by a decrease in legal expenses. In fiscal 1998 The Company incurred approximately $2.0 million in legal expenses associated with a previously announced complaint filed by Sun Microsystems, Inc. which was resolved in April 1998. Other income, net totaled $436,000 and $268,000 in fiscal 1999 and 1998, respectively. Other income in both years consists primarily of net interest income. 7 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 offset the selling price decline. Workstation and server users increasingly purchased larger capacity memory boards based on 64 megabit DRAM technology as these products have became 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 led to an expanded customer base and increased volume. In fiscal 1998, the Company entered into a licensing agreement with Silicon Graphics, Inc. which 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 in fiscal 1998, a decrease from fiscal 1997 expenditures of $1.0 million. 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. Fiscal 1997 expenses related to this matter totaled approximately $400,000. The litigation was resolved in fiscal 1998 and all expenses associated with the litigation were either paid or accrued as of the end of fiscal 1998. The remainder of the year over year increase was 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. Liquidity and Capital Resources During fiscal 1999 the Company purchased and retired 338,000 shares of its common stock at a total price of $2.6 million while still maintaing a strong working capital and cash position. Working capital at the end of fiscal 1999 amounted to $17.4 million, including cash and cash equivalents of $8.1 million, compared to working capital of $14.5 million, including cash and cash equivalents of $7.5 million in fiscal 1998. Current assets at year end were 3.7 times current liabilities compared to 3.2 at the end of fiscal 1998. Inventories at the end of fiscal 1999 were $3.3 million compared to fiscal 1998 year-end inventories of $2.9 million. Currently, DRAMs remain readily available and the Company maintains only the required level of inventory necessary to support its customer base. Capital expenditures were $1.2 million in fiscal 1999 compared to $2.0 million in fiscal 1998. Capital expenditures in both years were primarily for manufacturing equipment, leasehold improvements and management information systems upgrades. At the end of fiscal 1999, contractual commitments for capital purchases were nil. Fiscal 2000 capital expenditures are expected to be approximately the same level as fiscal 1999 expenditures. The Company's products are all year 2000 compliant. The Company has upgraded its manufacturing, accounting, production and inventory control systems and software and management believes that these systems and software are now or will be year 2000 compliant by year end. The Company has numerous personal computers and peripheral devices used in information technology and non-information technology applications which have been tested for year 2000 compliance. The Company has upgraded or replaced any known non year 2000 compliant devices and management believes that these devices are now year 2000 compliant. Management estimates that the financial impact of the upgrade will not have a material 8 effect on the Company's consolidated financial condition, results of operations and liquidity. As part of the Company's Year 2000 readiness program, the Company has identified its key vendors and suppliers and is attempting to ascertain their stage of year 2000 readiness primarily through questionnaires and interviews. The Company has a diverse customer base, with no single customer accounting for 10% or more of its revenue. At this time, the Company has no plans to ascertain the stage of year 2000 readiness of its current customers. The possible consequences of the Company, its key vendors, certain customers, governments or government agencies, financial institutions, utilities, etc. of not being year 2000 compliant by January 1, 2000 include but are not limited to, among other things, a temporary plant closing, delays in the delivery of products, delays in collection of receivables and supply disruption. Because of the widespread nature of this problem, no assurances can be made that the Company will not be materially adversely affected by a temporary inability of the Company to conduct its business in the ordinary course for a period of time after January 1, 2000. However, management believes that the actions it has taken should significantly reduce the adverse effect any such disruptions may have. On September 10, 1998, the Company announced an open market repurchase program providing for the repurchase of up to 500,000 shares of its common stock. On June 15, 1999, the Company announced an additional open market repurchase plan providing for the repurchase of up to 500,000 shares of the Company's common stock. As of June 15, 1999, the total number of shares authorized for purchase under the two programs is 614,000 shares. Inflation has not had a significant impact on the Company's revenue and operations. During fiscal 1999, the Company renewed its $12 million unsecured revolving credit line with its bank. The credit facility was unused during fiscal 1999. 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. Quantitative and Qualitative Disclosure About Market Risk The Company does not invest in market risk sensitive instruments. The Company's investments during the past fiscal year have consisted of overnight deposits with banks. The average principal sum invested was approximately $8,500,000 and the weighted average effective interest weight for these investments was approximately 5.25%. The Company's rate of return on its investment portfolio changes with short-term interest rates, although such changes will not effect the value of its portfolio. The Company's objectives in connection with its investment strategy is to maintain the security of its cash reserves without taking market risk with principal. As the current premium for investing long term is small by historic standards, it does not, in management's judgement, justify a risk as to the security of principal. The Company maintains a limited inventory of its products in Europe. The Company is considering marketing its products in Euro denominations. 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 and adjusted for a two-for-one stock split distributed on December 3, 1998. 1999 1998 ___________________ __________________ High Low High Low ___________________ __________________ First Quarter 6 3/4 5 11/16 5 7/16 4 1/2 Second Quarter 7 7/16 5 3/16 5 3/16 4 1/16 Third Quarter 10 3/4 7 5/16 4 27/32 4 Fourth Quarter 10 1/4 6 3/4 6 11/32 4 29/32 At April 30, 1999 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. 9 DATARAM CORPORATION AND SUBSIDIARY Consolidated Balance Sheets April 30, 1999 and 1998 (In thousands, except share amounts) 1999 1998 ______ ______ Assets Current assets: Cash and cash equivalents $ 8,093 $ 7,530 Trade receivables, less allowance for doubtful accounts of $450 in 1999 and 1998 12,016 10,076 Inventories: Raw materials 1,335 1,759 Work in process 508 61 Finished goods 1,447 1,103 ______ ______ 3,290 2,923 Deferred income taxes (note 3) 368 425 Other current assets 107 68 ______ ______ Total current assets 23,874 21,022 ______ ______ Property and equipment, at cost: Land 875 875 Machinery and equipment 5,189 8,806 ______ ______ 6,064 9,681 Less accumulated depreciation 2,573 6,246 ______ ______ Net property and equipment 3,491 3,435 Other assets 9 7 ______ ______ $27,374 $24,464 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 4,344 $ 4,699 Accrued liabilities (note 7) 2,092 1,784 ______ ______ Total current liabilities 6,436 6,483 Deferred income taxes (note 3) 919 1,013 ______ ______ Total liabilities 7,355 7,496 ______ ______ Stockholders' equity (notes 4 and 5): Common stock, par value $1.00 per share. Authorized 18,000,000 shares; issued and outstanding 5,236,810 in 1999 and 2,781,405 in 1998 5,237 2,781 Additional paid-in capital - 2,126 Retained earnings 14,782 12,061 ______ ______ Total stockholders' equity 20,019 16,968 ______ ______ Commitments and contingencies (notes 6 and 10) $27,374 $24,464 ====== ====== See accompanying notes to consolidated financial statements. 10 DATARAM CORPORATION AND SUBSIDIARY Consolidated Statements of Earnings Years ended April 30, 1999, 1998 and 1997 (In thousands, except per share amounts) 1999 1998 1997 _______ _______ _______ Revenues (note 9) $ 75,853 $ 77,286 $ 68,980 _______ _______ _______ Costs and expenses (notes 6 and 8): Cost of sales 54,814 58,608 54,409 Engineering and development 1,373 1,113 1,030 Selling, general and administrative 11,108 11,766 7,674 _______ _______ _______ 67,295 71,487 63,113 _______ _______ _______ Earnings from operations 8,558 5,799 5,867 Other income (expense): Other income, net - 3 18 Interest income 479 305 276 Interest expense (43) (40) (67) _______ _______ _______ 436 268 227 _______ _______ _______ Earnings before income tax expense 8,994 6,067 6,094 Income tax expense (note 3) 3,359 2,345 2,325 _______ _______ _______ Net earnings $5,635 $3,722 $3,769 ======= ======= ======= Net earnings per common share: Basic $ 1.03 $ .63 $ .56 ======= ======= ======= Diluted $ .90 $ .60 $ .55 ======= ======= ======= See accompanying notes to consolidated financial statements. 11 DATARAM CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended April 30, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 ______ _____ ______ Cash flows from operating activities: Net earnings $5,635 $3,722 $3,769 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,147 785 594 Bad debt expense (recovery) (125) 435 263 Deferred income tax expense (benefit) (37) (2) 50 Changes in assets and liabilities: (Increase) decrease in trade receivables (1,815) (2,038) 3,342 (Increase) decrease in inventories (367) 1,473 (2,084) Decrease in income tax receivable - 48 376 (Increase) decrease in other current assets (39) 33 (51) (Increase) in other assets (2) (1) - Increase (decrease) in accounts payable (355) 554 (1,764) Increase in accrued liabilities 308 691 70 _____ _____ _____ Net cash provided by operating activities 4,350 5,700 4,565 _____ _____ _____ Cash flows from investing activities: Purchase of property and equipment (1,203) (1,966) (650) _____ _____ _____ Net cash used in investing activities (1,966) (1,966) (650) _____ _____ _____ Cash flows from financing activities: Purchase and subsequent cancellation of shares of common stock (2,615) (3,318) (5,671) Proceeds from sale of common shares under stock option plan (including tax benefits) 31 278 110 _____ _____ _____ Net cash used in financing activities (2,584) (3,040) (5,561) _____ _____ _____ Net increase (decrease) in cash and cash equivalents 563 694 (1,646) Cash and cash equivalents at beginning of year 7,530 6,836 8,482 _____ _____ _____ Cash and cash equivalents at end of year $ 8,093 $ 7,530 $ 6,836 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 40 $ 52 $ 43 Income taxes $ 2,950 $ 2,033 $ 1,881 ===== ===== ===== See accompanying notes to consolidated financial statements. 12 DATARAM CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended April 30, 1999, 1998 and 1997 (In thousands, except share amounts) Total Additional stock- Common paid-in Retained holders' stock capital earning equity ______ ________ _______ ________ 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 Two-for-one common stock split 2,782 (2,126) (656) - Issuance of 12,000 shares under stock option plans 12 19 - 31 Purchase and subsequent cancellation of 338,000 shares (338) (19) (2,258) (2,615) Net earnings - - 5,635 5,635 ______ ________ _______ ______ Balance at April 30, 1999 $ 5,237 $ - $14,782 $20,019 ====== ======== ======= ======= See accompanying notes to consolidated financial statements. 13 Notes to Consolidated Financial Statements (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 purchased 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. 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 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, 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 after giving retroactive effect to the two-for-one stock split declared on November 11, 1998 and distributed to shareholders on December 3, 1998 (see note 4). 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). 14 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, 1999 Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 5,635 5,454,495 $ 1.03 Effect of dilutive securities - -stock options - 778,230 _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 5,635 6,232,725 $ .90 ======= ========= ====== 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 5,916,030 $ .63 Effect of dilutive securities - -stock options - 320,620 _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 3,722 6,236,650 $ .60 ======= ========= ====== 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 6,721,950 $ .56 Effect of dilutive securities - -stock options - 142,572 _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 3,769 6,864,522 $ .55 ======= ========= ====== 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 The fair value of financial instruments is determined by reference to market data and other valuation techniques as appropriate. The Company believes that there is no material difference between the fair value and the reported amounts of financial instruments in the consolidated balance sheets. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of Long-Lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to 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. Stock Based Compensation Stock based compensation is recognized using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. For disclosures purposes, net earnings and net earnings per 15 share data included in note 5 are provided in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"), as if the fair value method had been applied. (2) Long-Term Debt On November 1, 1998, the Company amended and restated its credit facility with its bank. Under the amended agreement, the Company modified certain financial covenants, eliminated its term loan facility and increased its revolving credit facility to $12,000,000 until October 31, 1999, at which point it will decrease to $6,000,000 until October 31, 2000. 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 under this facility during fiscal 1999 and 1998. As of April 30, 1999, 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) 1999 1998 1997 _____ _____ _____ Current: Federal $ 2,958 $ 1,889 $ 1,889 State 438 458 386 _____ _____ _____ 3,396 2,347 2,275 _____ _____ _____ Deferred: Federal (33) (1) (26) State (4) (1) 76 _____ _____ _____ (37) (2) 50 _____ _____ _____ Total income tax expense $ 3,359 $ 2,345 $ 2,325 ===== ===== ===== 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) 1999 1998 1997 _____ _____ _____ Computed "expected" tax expense $ 3,058 $ 2,063 $ 2,072 State income taxes(net of Federal income tax benefit) 286 303 303 Other 15 (21) (50) _____ _____ _____ $ 3,359 $ 2,345 $ 2,325 ===== ===== ===== 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) 1999 1998 ____ ____ Deferred tax assets: Compensated absences, principally due to accrual for financial reporting purposes $ 77 $ 125 Accounts receivable, principally due to allowance for doubtful accounts 176 176 Property and equipment, principally due to differences in depreciation 199 104 Inventory, principally due to reserve for obsolescence 10 20 ____ ____ Total gross deferred tax assets 462 425 ____ ____ 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 $(551) $(588) ==== ==== (4) Common Stock Transactions On November 11, 1998, the Company's Board of Directors announced a two-for-one stock split effected in the form of a dividend for shareholders of record at the close business on November 23, 1998 and payable December 3, 1998. The stock split has been charged to additional paid-in capital and retained earnings at par value. Share amounts in the notes to the financial statements, weighted average shares outstanding and net earnings per share have been retroactively adjusted to reflect the stock split. (5) Stock Option Plans During 1982, the Company adopted an incentive stock option plan. In 1995. In 1997, 6,000 (pre-split) options were exercised under this plan at an exercise price of $3.567 (pre-split). 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 16 employees. In general, the plan allows granting of up to 1,900,000 shares, adjusted for the two-for-one stock split, 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, 1999, 669,600 of the outstanding options are exercisable. The status of the 1992 plan for the three years ended April 30, 1999, adjusted for the two-for-one stock split, is as follows: Options Outstanding _____________________________ Exercise price Shares per share _________ _______________ Balance April 30, 1996 704,000 $ 2.563-3.563 Granted 334,000 3.469 Exercised (26,000) 2.563-3.563 Cancelled (20,000) 3.563 _________ ____________ Balance April 30, 1997 992,000 2.563-3.563 Granted 464,000 4.219-5.375 Exercised (78,000) 3.563 Cancelled (44,000) 2.563-4.688 _________ ____________ Balance April 30, 1998 1,334,000 2.563-5.375 Granted 116,000 5.406 Exercised (12,000) 2.563 Cancelled ( 8,000) 2.563 _________ ____________ Balance April 30, 1999 1,430,000 $ 2.563-5.406 ========== ============ 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, and expire five years after 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, 1999, 90,000 of the outstanding options are exercisable. The status of the nonemployee director options for the three years ended April 30, 1999, adjusted for the two-for-one stock split, is as follows: Options Outstanding ___________________________ Exercise price Shares per share ______ _______________ Balance April 30, 1996 240,000 $ 5.625 Granted 60,000 3.469 Exercised - - Cancelled - - ________ ____________ Balance April 30, 1997 300,000 3.469-5.625 Granted 240,000 4.219 Exercised - - Cancelled (240,000) 5.625 ________ ____________ Balance April 30, 1998 300,000 3.469-4.219 Granted - - Exercised - - Cancelled - - ________ ____________ Balance April 30, 1999 300,000 $3.469-4.219 ======== ============ The following table, adjusted for the two-for-one stock split, summarizes information about stock options outstanding at April 30, 1999: 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, 1999 life price 1999 price ____________ _________ ____________ ________ _________ ________ $2.563-3.563 850,000 5.16 $ 3.34 582,800 $ 3.38 4.219-4.875 640,000 6.77 4.28 140,000 4.28 5.375-5.406 240,000 8.65 5.39 36,800 5.38 ____________ _________ ____________ _______ _________ _______ $2.563-5.406 1,730,000 6.55 $ 3.97 759,600 $ 3.64 ============ ========= ============ ======= ========= ======= 17 The Company 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 the 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) April 30, ________________________ 1999 1998 1997 ____ ____ ____ Net earnings: As reported $ 5,635 $ 3,722 $ 3,769 Pro forma 5,346 3,517 3,667 Net earnings per common share (adjusted for two-for-one stock split): Basic: As reported 1.03 .63 .56 Pro forma .98 .59 .55 Diluted: As reported .90 .60 .55 Pro forma .86 .56 .53 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 1999, 1998 and 1997. 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 1999, 1998 and 1997 was $2.81, $2.43 and $2.07, respectively, on the date of the grant using the BlackScholes option pricing model with the following assumptions: for 1999 - expected dividend yield 0.0%, risk free interest rate of 6.5%, expected volatility of 34%, and an expected life of 7.5 years; 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; for 1997 - expected dividend yield 0.0%, risk free interest rate of 7%, expected volatility of 41%, and an expected life of 7 years. (6) Commitments The Company and its subsidiary occupy various facilities and operate various equipment under operating lease arrangements. Rents charged to operations amounted to approximately $790,000 in 1999, $593,000 in 1998 and $612,000 in 1997. Minimum annual rental commitments for all noncancellable operating leases as of April 30, 1999 are approximately as follows: (In thousands) 2000 $ 748 2001 431 2002 125 _____ $1,304 ===== During the year ended April 30, 1998, the Company signed licensing agreements with Silicon Graphics, Inc. (SGI) and Sun Microsystems, Inc. (SUN) to manufacture memory upgrades for certain high performance servers and workstations. The Company signed an additional licensing agreement with SGI for certain products in fiscal 1999. Under these agreements, the Company is obligated to pay a royalty based on sales of such products. (7) Accrued Liabilities Accrued liabilities consist of the following: (In thousands) 1999 1998 ____ ____ Payroll, including vacation $ 288 $ 474 Commissions and bonuses 999 563 Royalties (note 6) 420 364 Other 385 383 ______ ______ $2,092 $1,784 ====== ====== 18 (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 $181,000, $133,000 and $121,000 in 1999, 1998 and 1997, respectively. (9) Revenues by Geographic Location The Company operates in one business segment and develops, manufactures and markets a variety of memory systems for use with workstations and servers which are manufactured by various computer systems companies. Revenues for 1999, 1998 and 1997 by geographic region is as follows: (in thousands) Export ________________ Years ended April 30, United Europe Other Consolidated States _______ _______ ______ ____________ 1999 $ 56,292 $ 13,960 $5,601 $ 75,853 1998 $ 54,989 $ 14,860 $7,437 $ 77,286 1997 $ 50,147 $ 12,988 $5,845 $ 68,980 (10) 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 inline 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. 19 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1999, in conformity with generally accepted accounting principles. KPMG LLP Princeton, New Jersey May 20, 1999 20 Selected Financial Data (Not covered by independent auditors' report) (In thousands, except per share amounts) Years Ended April 30, 1999 1998 1997 1996 1995 ______________________ ____ ____ ____ ____ ____ Revenues $ 75,853 $ 77,286 $ 68,980 $107,627 $103,028 Net earnings (loss) 5,635 3,722 3,769 1,450 (1,299) Basic earnings (loss) per share 1.03 .63 .56 .19 (.17) Diluted earnings (loss) per share .90 .60 .55 .19 (.17) Current assets 23,874 21,022 20,277 23,735 24,710 Total assets 27,374 24,464 22,537 25,939 27,355 Current liabilities 6,436 6,483 5,238 6,932 10,649 Long-term debt - - - - - Total stockholders' equity 20,019 16,968 16,286 18,078 16,390 Cash dividends - - - - - Earnings per share data has been adjusted to reflect the two-for-one stock split for shareholders of record on December 3, 1998. Quarterly Financial Data (Unaudited) (In thousands, except per share amounts) Quarter Ended ____________________________________________ Fiscal 1999 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $17,750 $16,262 $18,922 $22,919 Gross profit 5,480 5,167 5,053 5,339 Net earnings 1,417 1,290 1,422 1,506 Net earnings (diluted) per common and common equivalent share .23 .21 .22 .24 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 .11 .15 .17 .18 Earnings per share is calculated independently for each quarter and therefore does not equal the total for the year. Earnings per share data has been adjusted to reflect the two-for-one stock split for shareholders of record on December 3, 1998. 21 DIRECTORS AND CORPORATE OFFICERS Directors Robert V. Tarantino Chairman of the Board of Directors, President and Chief Executive Officer of Dataram Corporation Richard Holzman* Private Investor Thomas A. Majewski* Principal, Walden Inc. Bernard L. Riley* Private Investor Roger 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 Jay Litus Vice President, Business Development Thomas J. Bitar Secretary Partner, Dillon, Bitar & Luther Corporate Headquarters Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 609-799-0071 Auditors KPMG 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 8, 1999, at 2:00 p.m. at Dataram's corporate headquarters at: 186 Princeton Road (Route 571) West Windsor, NJ 08550 Form 10-K A copy of the Company's annual report on Form 10-K filed with the Securities & Exchange Commission is available without charge to shareholders. Address requests to: Vice President, Finance Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 22 Dataram Corporation Corporate Headquarters-186 Princeton Road (Route 571)-West Windsor, NJ 08550 Toll Free: 800-DATARAM Phone: 609-799-0071 Fax: 609-799-6734 Web Site: www.dataram.com