SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) / X / Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended 7/31/03 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to Commission file number 1-8266 DATARAM CORPORATION ___________________________________________________________________________ (Exact name of registrant as specified in its charter) New Jersey 22-1831409 __________________________________ _____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) P.O. Box 7528, Princeton, NJ 08543 ____________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 799-0071 ____________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Common Stock ($1.00 par value): As of September 3, 2003, there were 8,497,219 shares outstanding. PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Dataram Corporation and Subsidiaries Consolidated Balance Sheets July 31, 2003 and April 30, 2003 (Unaudited) July 31, 2003 April 30, 2003 Assets Current Assets: Cash and cash equivalents $ 2,068,366 $ 2,500,497 Trade receivables, less allowance for doubtful accounts and sales returns of $320,000 4,850,159 6,292,059 Income tax receivable 3,137,983 3,137,983 Inventories 2,630,639 2,854,860 Deferred income taxes 723,000 723,000 Other current assets 347,225 110,720 __________ __________ Total current assets 13,757,372 15,619,119 Property and equipment, at cost: Land (held for sale) 875,000 875,000 Machinery and equipment 12,261,681 12,576,271 __________ __________ 13,136,681 13,451,271 Less: accumulated depreciation and amortization 9,006,125 8,887,181 __________ __________ Net property and equipment 4,130,556 4,564,090 Other assets 46,131 24,126 __________ __________ $ 17,934,059 $ 20,207,335 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 2,677,960 $ 3,207,446 Accrued liabilities 1,063,548 2,978,704 __________ __________ Total current liabilities 3,741,508 6,185,704 Stockholders' Equity: Common stock, par value $1.00 per share. Authorized 54,000,000 shares; issued and outstanding 8,497,219 at July 31, 2003 and April 30, 2003 8,497,219 8,497,219 Additional paid in capital 4,593,851 4,593,851 Retained earnings 1,101,481 930,561 __________ __________ Total stockholders' equity 14,192,551 14,021,631 __________ __________ $ 17,934,059 $ 20,207,335 ========== ========== See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiary Consolidated Statements of Operations Three Months Ended July 31, 2003 and 2002 (Unaudited) 2003 2002 Revenues $ 12,266,796 $ 14,281,078 Costs and expenses: Cost of sales 8,817,749 10,739,518 Engineering and development 332,741 381,208 Selling, general and administrative 2,979,880 4,537,000 Restructuring charges 0 740,000 __________ __________ 12,130,370 16,397,726 Earnings (loss) from operations 136,426 (2,116,648) Other income (expense) Interest income (expense), net 1,479 (43,876) Other income (expense), net 48,015 0 __________ __________ Total other income (expense) 49,494 (43,876) Earnings (loss) before income taxes 185,920 (2,160,524) Income tax provision (benefit) 15,000 (338,000) __________ __________ Net earnings (loss) $ 170,920 $ (1,822,524) ========== ========== Net earnings (loss) per share of common stock Basic $ .02 $ (.21) ========== ========== Diluted $ .02 $ (.21) ========== ========== Weighted average number of common shares outstanding Basic 8,497,219 8,483,139 ========== ========== Diluted 8,617,124 8,483,139 ========== ========== See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended July 31, 2003 and 2002 (Unaudited) 2003 2002 Cash flows from operating activities: Net income (loss) $ 170,920 $ (1,822,524) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 447,266 1,004,000 Bad debt expense 5,837 48,874 Changes in assets and liabilities: Decrease in trade receivables 1,436,063 5,148,932 Decrease in inventories 224,221 969,533 Decrease in income tax receivable 0 38,000 (Increase) decrease in other current assets (236,505) 45,247 Increase in other assets (22,005) (31,000) Decrease in accounts payable (529,486) (3,091,124) (Decrease) increase in accrued liabilities (1,915,156) 560,908 Decrease in deferred income taxes 0 1,000 __________ __________ Net cash (used in)provided by operating activities (418,399) 2,871,846 ___________ __________ Cash flows used in investing activities- Additions to property and equipment, net (13,732) (125,111) ___________ __________ Cash flows from financing activities: Borrowings (payments) under revolving credit line 0 (2,300,000) Proceeds from sale of common shares under stock option plan, (including tax benefits) 0 28,125 Purchase and subsequent cancellation of common stock 0 (140,124) __________ __________ Net cash used in financing 0 (2,411,999) activities __________ __________ Effect of foreign currency translation on cash and cash equivalents 0 380,357 __________ __________ Net (decrease) increase in cash and cash equivalents (432,131) 715,093 Cash and cash equivalents at beginning of period 2,500,497 3,656,150 __________ __________ Cash and cash equivalents at end of period $ 2,068,366 $ 4,371,243 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 15,716 $ 55,876 Income taxes $ 0 $ 21,000 See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiaries Notes to Consolidated Financial Statements July 31, 2003 and 2002 (Unaudited) Basis of Presentation The information for the three months ended July 31, 2003 and 2002, is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth therein in accordance with accounting principles generally accepted in the United States of America. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited financial statements for the year ended April 30, 2003 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Comprehensive Income (loss) Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130") requires that items defined as other comprehensive income, such as unrealized investment gains and losses and translation gains and losses, be separately classified in the consolidated financial statements and that the accumulated balance of other comprehensive income (loss) be reported separately from retained earnings and additional paid in capital in the equity section of the consolidated balance sheet. Comprehensive income (loss) for the three months ended July 31, 2003 and 2002 was $171,000 and ($1,442,000), respectively. Earnings Per Common Share Basic earnings per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of shares of Common Stock issued and outstanding during the periods. For purposes of calculating diluted earnings per share for the three months ended July 31, 2003, the denominator includes both the weighted average number of shares of Common Stock outstanding and the number of dilutive Common Stock equivalents. The number of dilutive Common Stock equivalents includes the effect of non- qualified stock options calculated using the treasury stock method. For purposes of calculating diluted loss per share for the three months ended July 31, 2002, the denominator excludes the number of dilutive Common Stock equivalents as their affect would be anti-dilutive. Stock Based Compensation As permitted by the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", the Company accounts for stock-based compensation arrangements in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees". Compensation expense for stock options issued to employees is based on the difference on the date of grant, between the fair value of the Company's stock and the exercise price of the option. No stock- based employee compensation cost is reflected in net income (loss), as all options granted under those plans had exercise prices equal to the market value of the underlying common stock at the date of grant. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for interim periods beginning after December 15, 2002. The Company continues to apply the intrinsic-value based method to account for stock options. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based compensation: Three Months Ended July 31, ------------------------- 2003 2002 ----------- ----------- Net earnings (loss) as reported $ 170,920 $(1,822,524) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects .... (149,146) (254,381) ----------- ----------- Pro forma net earnings (loss) .... $ 21,774 $(2,076,905) =========== =========== Earnings (loss) per share: Basic - as reported ........... $ 0.02 $ (0.21) =========== =========== Basic - pro forma ............. $ 0.00 $ (0.24) =========== =========== Diluted - as reported ......... $ 0.02 $ (0.21) =========== =========== Diluted - pro forma ........... $ 0.00 $ (0.24) =========== =========== Restructuring charges In fiscal 2003's first quarter, the Company initiated a restructuring of its operations. The Company recorded a restructuring charge of $740,000, in the quarter ended July 31, 2002, which primarily related to severance payments. All of the severance payments were paid during fiscal year 2003. During the fourth quarter of fiscal 2003, the Company announced an additional restructuring of its operations. As part of this restructuring, the Company ceased production of memory for the PC market and closed its production facility in Aarhus, Denmark. As part of the restructuring, the Company entered into lease termination agreements totaling approximately $1,000,000 which were paid in the first quarter of fiscal 2004. The Company also incurred severance payments obligations totaling approximately $850,000. As of July 31, 2003, severance payments totaling $730,000 have been made, with the balance of approximately $120,000 expected to be paid out by the end of the second quarter of fiscal 2004. Cash and cash equivalents Cash and cash equivalents consist of unrestricted cash, money market funds 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. Inventories at July 31, 2003 and April 30, 2003 consist of the following categories: July 31, 2003 April 30, 2003 ________________ ______________ Raw material $ 1,101,000 $ 1,972,000 Work in process 130,000 39,000 Finished goods 1,400,000 844,000 ________________ ______________ $ 2,631,000 $ 2,855,000 ================ ============== Financial information by geographic location The Company operates in one business segment and develops, manufactures and markets a variety of memory systems for use with network servers and workstations which are manufactured by various companies. Revenues for the three months ended July 31, 2003 and 2002 by geographic region is as follows: Three months Three months ended ended July 31, 2003 July 31, 2002 ________________ ________________ United States $ 8,015,000 $ 9,077,000 Europe 2,749,000 3,950,000 Other (principally Asia Pacific Region) 1,503,000 1,254,000 ________________ ________________ Consolidated $ 12,267,000 $ 14,281,000 ================ ================ Long-lived assets consist of property and equipment as of July 31, 2003. Long- lived assets and total assets by geographic region as of July 31, 2003 is as follows: July 31, 2003 Long-lived assets Total assets _________________ ______________ United States $ 4,040,000 $ 17,076,000 Europe 91,000 829,000 Other 0 29,000 _________________ ______________ Consolidated $ 4,131,000 $ 17,934,000 ================= ============== Significant New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 was effective for the Company's fiscal year beginning after May 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company's operations and financial position upon adoption. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not expect FIN 46 to have a material effect on its consolidated financial statements. 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. 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities and Exchange Act of 1934, as amended. The information provided in this interim report may include forward-looking statements relating to future events, such as the development of new products, the commencement of production or the future financial performance of the Company. Actual results may differ from such projections and are subject to certain risks including, without limitation, risks arising from: changes in the price of memory chips, changes in the demand for memory systems for workstations and servers, increased competition in the memory systems industry, delays in developing and commercializing new products and other factors described in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission which can be reviewed at http://www.sec.gov. Liquidity and Capital Resources The Company's cash and working capital position remain strong. As of July 31, 2003, cash and equivalents amounted to $2.1 million and working capital amounted to $10.0 million, reflecting a current ratio of 3.7 compared to cash and equivalents of $2.5 million and working capital of $9.4 million and a current ratio of 2.5 as of April 30, 2003. Subsequent to the end of the July 2003 quarter, the Company received approximately $3.0 million of its income tax receivable. On June 15, 1999 the Company announced an open market repurchase plan providing for the repurchase of up to 500,000 shares of the Company's common stock. On December 4, 2002, the Company announced a second plan providing for the repurchase of up to an additional 500,000 shares. As of July 31, 2003, the total number of shares authorized for purchase under the program is 535,150 shares. The Company did not purchase any shares during the first quarter of Fiscal 2004. As a result of the restructuring initiated in April 2003, the Company entered into lease termination agreements totaling approximately $1 million and had severance obligations totaling approximately $850,000 as of April 30, 2003. The lease termination obligations were paid in the first quarter of fiscal 2004. Approximately $730,000 of the severance obligations were paid by July 31, 2003 with the balance of approximately $120,000 scheduled to be paid in the second quarter of fiscal 2004. Management believes that the Company's operating cash flows will be sufficient to meet short term liquidity needs as the Company does not expect any unforeseen demands beyond general operating requirements. Management further believes that its working capital together with internally generated funds from its operations are adequate to finance the Company's long term operating needs and future capital requirements. On July 29, 2002, the Company entered into an agreement to sell its undeveloped land for a price of $3.0 million. The agreement provides for closing to occur no later than 30 months from the date of the contract. Additionally, the agreement is subject to certain contingencies and as such may be terminated prior to closing. The land is carried at cost on the Company's balance sheet at a value of $875,000 and is shown as an asset held for sale. The resulting gain on the sale will be recorded upon consummation of the transaction and when all contingencies have been satisfied. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2003 are as follows: Operating leases Year ending April 30: ________________ 2004 $ 552,000 2005 572,000 2006 486,000 2007 48,000 Thereafter 0 Total minimum lease payments $ 1,658,000 The Company has no other material commitments. Results of Operations Revenues for the three-month period ending July 31, 2003 were $12,267,000 compared to revenues of $14,281,000 for the comparable prior year period. The decrease in revenues was the result of lower unit volume, as measured by gigabytes shipped, of approximately 19% offset by an average selling price increase of approximately 6%. The decrease in volume is primarily attributable to the Company's previously announced decision to cease offering memory for the PC market. Revenues for the three month periods ended July 31, 2003 and 2002 by geographic region were: Three months Three months ended ended July 31, 2003 July 31, 2002 ________________ ________________ United States $ 8,015,000 $ 9,077,000 Europe 2,749,000 3,950,000 Other (principally Asia Pacific Region) 1,503,000 1,254,000 ________________ ________________ Consolidated $ 12,267,000 $ 14,281,000 ================ ================ Cost of sales for the first quarter fiscal 2004 were 72% of revenues, versus 75% same prior year period. The decrease in cost of sales as a percentage of revenues is primarily the result of increased utilization of manufacturing capacity as the result of the Company's closure of its manufacturing facility in Denmark at the end of fiscal 2003. The Company also stopped selling PC memory, which generally carried lower margins than memory for workstations and network servers. Engineering and development costs in fiscal 2004's first quarter were $333,000, versus $381,000 for the same prior year period. The decrease in expense is primarily attributable to the reduced number of employees as a result of the restructurings. The Company intends to maintain its commitment to the timely introduction of new memory products as new computers are introduced. Selling, general and administrative costs in fiscal 2004's first quarter decreased to 24% of revenues, versus 32% for the same prior year period. Total expenditures decreased by $1,557,000 from the comparable prior year period. The reduction of total expenses is primarily the result of the aforementioned restructurings and reduction in workforce. Other income (expense), net for the first quarter fiscal 2004 totaled $49,000 income, versus ($44,000) expense for the same prior year period. Other income (expense), net in fiscal 2004's first quarter consisted primarily of $40,000 of gain on the sale of certain assets. Fiscal 2003's first quarter other income (expense) of ($44,000) consisted primarily of interest expense. The Company had no interest expense in the first quarter of fiscal 2004 as it had no debt. Income tax expense (benefit) for the first quarter fiscal 2004 was $15,000 expense versus ($338,000) benefit in the comparable prior year period. In fiscal 2004's first quarter the tax expense is a provision for state tax only as the Company has a Federal net operating loss carry forward of approximately $16.0 million, which can be used to offset future taxable income for federal income tax. In fiscal 2003's first quarter the Company recorded a tax benefit on the losses sustained in its US operations. Critical Accounting Policies During December 2001, the Securities and Exchange Commission ("SEC") published a Commission Statement in the form of Financial Reporting Release No. 60 which encouraged that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC has defined critical accounting policies as those that are both important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While the Company's significant accounting policies are summarized in Note 1 to the consolidated financial statements included in the Company's Form 10-K for the fiscal year ended April 30, 2003, the Company believes the following accounting policies to be critical: Revenue Recognition-Revenue is recognized upon shipment of goods to customers. The Company's revenue earning activities involve delivering or producing goods, and revenues are considered to be earned when the Company has completed the process by which it is entitled to such revenues. The following criteria are used for revenue recognition: persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured. Estimated warranty costs are accrued by management upon product shipment based on an estimate of future warranty claims. Income Taxes-The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. Use of Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including deferred tax asset valuation allowances and certain other reserves and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Some of the more significant estimates made by management include the allowance for doubtful accounts and sales returns, the deferred tax asset valuation allowance and other operating allowances and accruals. Actual results could differ from those estimates. ITEM 3. 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 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. The Company purchases and sells primarily in U.S. dollars. The Company sells in foreign currency (primarily Euros) to a limited number of customers and as such incurs some foreign currency risk. At any given time, approximately 15 to 20 percent of the Company's accounts receivable are denominated in currencies other than U.S. dollars. At present, the Company does not purchase forward contracts as hedging instruments, but may do so as circumstances warrant. ITEM 4. CONTROLS AND PROCEDURES During the period covered by this interim report, the Company's chief executive officer and its chief financial officer have evaluated the effectiveness of the Company's disclosure controls and procedures and have determined that they are adequate to insure a fair presentation, in all material respects, of the financial position, results of operations and statements of cash flows of the Company and there have been no material changes to such controls and procedures. PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits 31(a) Certification of Robert V. Tarantino 31(b) Certification of Mark E. Maddocks 32(a) Section 906 Certification of Robert V. Tarantino (furnished not filed) 32(b) Section 906 Certification of Mark E. Maddocks (furnished not filed) B. Reports on Form 8-K Report filed on August 20, 2003 regarding Company's operating results for the First Quarter, Fiscal Year 2004. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATARAM CORPORATION MARK E. MADDOCKS Date: September 5, 2003 By: _____________________________ Mark E. Maddocks Vice President, Finance (Principal Financial Officer)