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 10/31/04 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 _________ _________ APPLICABLE ONLY TO CORPORATE ISSUERS: 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 December 6, 2004, there were 8,603,113 shares outstanding. PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Dataram Corporation and Subsidiaries Consolidated Balance Sheets October 31, 2004 and April 30, 2004 (Unaudited) October 31, 2004 April 30, 2004 Assets Current Assets: Cash and cash equivalents $ 6,699,382 $ 6,805,957 Trade receivables, less allowance for doubtful accounts and sales returns of $315,000 at October 31,2004 and $320,000 at April 30, 2004 12,237,074 8,846,605 Inventories 3,038,125 2,536,976 Deferred income taxes 723,000 723,000 Other current assets 224,642 91,766 __________ __________ Total current assets 22,922,223 19,004,304 Property and equipment, at cost: Land (held for sale) 875,000 875,000 Machinery and equipment 12,128,331 11,933,987 __________ __________ 13,003,331 12,808,987 Less: accumulated depreciation and amortization 10,532,060 9,950,860 __________ __________ Net property and equipment 2,471,271 2,858,127 Other assets 53,815 50,011 __________ __________ $ 25,447,309 $ 21,912,442 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 5,322,504 $ 3,861,844 Accrued liabilities 700,180 1,646,499 __________ __________ Total current liabilities 6,022,684 5,508,343 Stockholders' Equity: Common stock, par value $1.00 per share. Authorized 54,000,000 shares; issued and outstanding 8,603,113 at October 31, 2004 8,526,519 at April 30, 2004 8,603,113 8,526,519 Additional paid in capital 4,927,206 4,676,232 Retained earnings 5,894,306 3,201,348 __________ __________ Total stockholders' equity 19,424,625 16,404,099 __________ __________ $ 25,447,309 $ 21,912,442 ========== ========== See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiaries Consolidated Statements of Operations Three and Six Months Ended October 31, 2004 and 2003 (Unaudited) 2004 2003 2nd Quarter Six Months 2nd Quarter Six Months Revenues $ 20,322,130 $ 36,113,562 $ 12,637,855 $ 24,904,651 Costs and expenses: Cost of sales 15,815,873 27,556,775 9,632,303 18,450,052 Engineering and development 312,046 630,819 312,943 645,684 Selling, general and administrative 2,574,689 5,123,192 2,878,533 5,858,413 __________ __________ __________ __________ 18,702,608 33,310,786 12,823,779 24,954,149 Earnings (loss) from operations 1,619,522 2,802,776 (185,924) (49,498) Interest income 18,699 33,709 6,727 8,206 Currency gain (loss), net (6,269) (6,527) 163 8,584 Other income 0 50,000 1,408 41,002 __________ __________ __________ __________ Earnings (loss) before income taxes 1,631,952 2,879,958 (177,626) 8,294 Income tax provision (benefit) 106,000 187,000 (15,000) 0 __________ __________ __________ __________ Net earnings (loss) $ 1,525,952 $ 2,692,958 $ (162,626) $ 8,294 ========== ========== ========== ========== Net earnings (loss) per share of common stock Basic $ .18 $ .31 $ (.02) $ .00 ========== ========== ========== ========== Diluted $ .17 $ .29 $ (.02) $ .00 ========== ========== ========== ========== Weighted average number of common shares outstanding Basic 8,599,070 8,580,730 8,497,219 8,497,219 ========== ========== ========= ========= Diluted 9,216,297 9,264,686 8,497,219 8,709,443 ========== ========== ========= ========= See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries Consolidated Statements of Cash Flows Six Months Ended October 31,2004 and 2003 (Unaudited) 2004 2003 Cash flows from operating activities: Net earnings $ 2,692,958 $ 8,294 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 613,000 893,267 Bad debt expense 7,646 4,095 Changes in assets and liabilities: (Increase)decrease in trade receivables (3,398,115) 676,788 (Increase)decrease in inventories (501,149) 447,947 Increase in other current assets (132,876) (270,125) Decrease in income tax receivable 0 3,087,983 Increase in other assets (3,804) (25,885) Increase (decrease) in accounts payable 1,460,660 (513,552) Decrease in accrued liabilities (946,319) (2,377,727) Increase in deferred income taxes 0 (99,202) __________ __________ Net cash provided by (used in) operating activities (207,999) 1,831,883 __________ __________ Cash flows from investing activities: Additions to property and equipment (238,985) (92,649) Proceeds from sale of property and equipment 12,841 18,175 __________ __________ Net cash used in investing activities (226,144) (74,474) Cash flows from financing activities: Proceeds from exercise of stock options under stock option plan, (including tax benefits) 327,568 0 __________ __________ Net increase (decrease) in cash and cash equivalents (106,575) 1,757,409 Cash and cash equivalents at beginning of period 6,805,957 2,500,497 __________ __________ Cash and cash equivalents at end of period $ 6,699,382 $ 4,257,906 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 8,676 $ 15,716 Income taxes $ 341,000 $ 2,250 See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements October 31, 2004 and 2003 (Unaudited) Basis of Presentation The information for the three and six months ended October 31, 2004 and 2003, 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, 2004 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Earnings Per Common Share Basic earnings (loss) per share is computed by dividing the net earnings (loss) available to common stockholders by the weighted average number of shares of common stock issued and outstanding during the periods. For the purpose of calculating diluted earnings per share for the three and six months ended October 31, 2004 and the six months ended October 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 stock options calculated using the treasury stock method. For purposes of calculating diluted loss per share for the quarter ended October 31, 2003, the denominator excludes the effect of options to purchase 1,054,050 shares of common stock as their effect would be anti-dilutive. Stock Based Compensation As permitted by 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 earnings (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 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 Six Months Ended October 31, October 31, --------------------- ------------------ 2004 2003 2004 2003 -------- -------- -------- -------- Net earnings (loss) as reported $ 1,525,952 $ (162,626) $ 2,692,958 $ 8,294 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (205,398) (217,445) (350,966) (366,591) ----------- --------- ----------- ---------- Pro forma net earnings (loss) $ 1,320,554 $ (380,071) $ 2,341,992 $(358,297) =========== ========= =========== ======== Earnings (loss) per share: Basic - as reported $ 0.18 $ (0.02) $ 0.31 $ 0.00 =========== ========= =========== ======== Basic - pro forma $ 0.15 $ (0.04) $ 0.27 $ (0.04) =========== ========= =========== ======== Diluted - as reported $ 0.17 $ (0.02) $ 0.29 $ 0.00 =========== ========= =========== ======== Diluted - pro forma $ 0.14 $ (0.04) $ 0.25 $ (0.04) =========== ========= =========== ========= Cash and cash equivalents Cash and cash equivalents consist of unrestricted cash, money market accounts and commercial paper with original maturities of three months or less. Inventory valuation Inventories are valued at the lower of cost or market, with cost determined by the first-in, first-out method. Inventories at October 31, 2004 and April 30, 2004 consist of the following categories: October 31, 2004 April 30, 2004 ________________ ______________ Raw material $ 1,705,000 $ 1,302,000 Work in process 186,000 102,000 Finished goods 1,147,000 1,133,000 ________________ ______________ $ 3,038,000 $ 2,537,000 ================ ============== 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 and six month periods ended October 31, 2004 and 2003 by geographic region is as follows: Three months ended Six months ended October 31, 2004 October 31, 2004 ________________ ________________ United States $ 16,300,000 $ 28,614,000 Europe 2,553,000 4,662,000 Other (prinicipally Asia Pacific Region) 1,469,000 2,838,000 ________________ ________________ Consolidated $ 20,322,000 $ 36,114,000 ================ ================ Three months ended Six months ended October 31, 2003 October 31, 2003 ________________ ________________ United States $ 8,416,000 $ 16,431,000 Europe 2,636,000 5,385,000 Other (prinicipally Asia Pacific Region) 1,586,000 3,089,000 ________________ ________________ Consolidated $ 12,638,000 $ 24,905,000 ================ ================ Long-lived assets which consist of property and equipment, and total assets by geographic region as of October 31, 2004 is as follows: October 31, 2004 Long-lived assets Total assets _________________ ______________ United States $ 2,471,000 $ 25,021,000 Europe 0 414,000 Other 0 12,000 _________________ ______________ Consolidated $ 2,471,000 $ 25,447,000 ================= ============== Significant New Accounting Pronouncements On April 22, 2003, the FASB determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost should be measured according to the fair value of stock options. The FASB issued an exposure draft, "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95" on June 30, 2004. Subsequent to the issuance of the FASB's exposure draft, the FASB determined that the final Statement, when issued, will be effective for any interim or annual period beginning after June 15, 2005, meaning that an entity would apply the final Statement to all employee awards of share-based payments granted, modified or settled in any interim or annual period beginning after June 15, 2005. This proposed statement, when formally issued by the FASB, may have a material effect on the Company's consolidated financial statements. In November 2004, the Financial Accounting Standards Board ("FASB') issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151, amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. The provisions of this Statement shall be effective for the Company beginning May 1, 2006. The Company is currently evaluating whether this statement will have a material effect on the Company's 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. In the second quarter and six months ended October 31, 2004, sales to one customer accounted for approximately 41% and 39% of revenues, respectively. The same customer accounted for approximately 46% of accounts receivable at October 31, 2004. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. Actual results could differ materially from those projected in the forward looking statements 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, order cancellations, 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. Executive Overview Dataram Corporation is a developer, manufacturer and marketer of large capacity memory products primarily used in high performance network servers and workstations. The Company provides customized memory solutions for original equipment manufacturers (OEMs) and compatible memory for leading brands including Dell, Hewlett-Packard, IBM, Silicon Graphics and Sun Microsystems. The Company also manufactures a line of memory products for AMD and Intel motherboard based servers for sale to OEMs and channel assemblers. The Company's memory products are sold worldwide to original equipment manufacturers, distributors, value-added resellers and end users. The Company has a manufacturing facility in the United States with sales offices in the United States, Europe and Japan. The Company is an independent memory manufacturer specializing in high capacity memory and competes with several other large independent memory manufacturers as well as the original equipment manufacturers mentioned above. The primary raw material used in producing memory boards is dynamic random access memory (DRAM) chips. The purchase cost of DRAM chips typically represents approximately 75% of the total cost of a finished memory board. Consequently, average selling prices for computer memory boards are significantly dependent on the pricing and availability of DRAM chips. Liquidity and Capital Resources The Company's cash and working capital position remain strong. As of October 31, 2004, cash and cash equivalents amounted to $6.7 million and working capital amounted to $16.9 million, reflecting a current ratio of 3.8 compared to cash and cash equivalents of $6.8 million and working capital of $13.5 million and a current ratio of 3.5 as of April 30, 2004. During the first six months of fiscal year 2005, net cash used in operating activities was $208,000. Accounts receivable increased by approximately $3.4 million from year-end levels. This increase was mainly the result of the increase in shipping levels in October. Accrued liabilities decreased by approximately $946,000 from year-end levels. This decrease was primarily due to a non-recurring royalty payment made in the first quarter of the current fiscal year which was accrued in the prior fiscal year totalling approximately $660,000. Partially offsetting these uses of cash was an increase in accounts payable of approximately $1,461,000 from year-end levels. This increase resulted from higher levels of raw material purchases made in October to support the October shipments. Net cash used in investing activities of approximately $226,000 for the six months ended October 31, 2004, primarily consists of $239,000 of capital expenditures substantially related to production testing equipment. Net cash provided from financing activities of approximately $328,000 for the six months ended October 31, 2004, primarily relates to the exercise of stock options, including tax benefits. 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 October 31, 2004, 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 six months of Fiscal 2005. On June 21, 2004 the Company entered into a Loan Agreement with a Bank through June 21, 2006. The Company has not as of this date borrowed any money under this Agreement. Pursuant to the Agreement, the Company can borrow up to 75% of qualified accounts receivables (generally consisting of U.S. and Canadian accounts receivable less than 90 days old) up to a maximum amount of $5,000,000. At the election of the Company, the interest rate is the bank's prime rate or LIBOR plus 2.5%. As security for any loans made under this Agreement, the Company has given a security interest in all of its personal property, including its accounts. Without the consent of the bank, the Company may not pay dividends nor expend more than $1,000,000 a year in repurchasing its common stock. The Company pays an annual commitment fee of ..25% on the unused line. 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 was amended on October 20, 2004. The amendment extended the term of the agreement to September 29, 2005. The agreement, as amended, provides for closing to occur no later than September 29, 2005. 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, 2004 are as follows: Operating leases Year ending April 30: ________________ 2005 $ 531,000 2006 463,000 2007 48,000 2008 and thereafter 0 Total minimum lease payments $ 1,042,000 The Company has no other material commitments. Results of Operations Revenues for the three month period ending October 31, 2004 were $20,322,000 compared to revenues of $12,638,000 for the comparable prior year period. Fiscal 2005 six month revenues totaled $36,114,000 versus six month revenues of $24,905,000 in the prior year. The increase is primarily attributable to an increase in sales to the Company's OEM customers. Fiscal 2005 second quarter sales to OEM customers was approximately 55% of overall revenues as compared to approximately 19% in the prior year's second quarter. Volume measured as gigabytes shipped increased by 58% for the second quarter of fiscal 2005 compared to the same prior year quarter. Average selling price per gigabyte increased by approximately 2% in fiscal 2005's second quarter compared to the prior year period. Six month volume increased 50% in fiscal 2005 as compared to the same prior year period. Average selling price for the first six months of fiscal 2005 decreased by approximately 4% compared to the same prior year period. Revenues for the three and six month periods ended October 31, 2004 and 2003 by geographic region is as follows: Three months ended Six months ended October 31, 2004 October 31, 2004 ________________ ________________ United States $ 16,300,000 $ 28,614,000 Europe 2,553,000 4,662,000 Other (prinicipally Asia Pacific Region) 1,469,000 2,838,000 ________________ ________________ Consolidated $ 20,322,000 $ 36,114,000 ================ ================ Three months ended Six months ended October 31, 2003 October 31, 2003 ________________ ________________ United States $ 8,416,000 $ 16,431,000 Europe 2,636,000 5,385,000 Other (prinicipally Asia Pacific Region) 1,586,000 3,089,000 ________________ ________________ Consolidated $ 12,638,000 $ 24,905,000 ================ ================ Cost of sales for the second quarter and six months were 78% and 76% of revenues, respectively, versus 76% and 74% for the same respective prior year periods. Cost of sales as a percentage of revenues for the second quarter was at the low end of our normal range. Management expects that cost of sales as a percentage of revenue will generally be approximately 75%, which is in line with its historical norm. Fluctuations either up or down of 3% or less in any given quarter are not unusual and can result from many factors, some of which are a rapid change in the price of DRAMs, or a change in product mix possibly resulting from a large order or series of orders for a particular product or a change in customer mix. Engineering and development costs in fiscal 2005's second quarter and six months were $312,000 and $631,000, respectively, versus $313,000 and $646,000 for the same respective prior year periods. 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 2005's second quarter and six months decreased to 13% and 14% of revenues, respectively versus 23% and 24% for the same prior year periods. The percentage of sales is lower in Fiscal 2005's second quarter and six months primarily as a result of higher revenues generated. Second quarter and six month total expenses decreased by $304,000 and $735,000 from the comparable prior year periods. The reduction of total expenses is primarily the result of decreased depreciation expense. Salary and employee related cost also decreased from the prior year primarily due to employee attrition. Other income (expense), net for the second quarter and six months totaled $12,000 and $77,000, respectively, for fiscal 2005 and $8,000 and $57,000 for the same respective periods in fiscal 2004. Other income in fiscal 2005's second quarter consisted primarily of interest income. Other income in fiscal 2005's six months consisted primarily of interest income and a scheduled non- refundable payment released from escrow of $50,000 related to the pending sale of the Company's land. Other income in fiscal 2004's six months consisted of interest income and a gain on sale of assets of approximately $49,000. The Company had no interest expense in the first quarter and six months of fiscal 2005 as it had no debt. Income tax provision (benefit) for fiscal 2005's second quarter and six months was $106,000 and $187,000 versus ($15,000) benefit and nil in the comparable prior year periods. Fiscal 2005's income tax provision is primarily a provision for state tax only as the Company has a net operating loss carry forward of approximately $14.0 million which can be used to offset future taxable income for federal income tax. 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, 2004, 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. Charges for sales returns and other allowances are recognized as a deduction from revenue on an accrual basis. The accrual for sales returns and other allowances is based on the Company's history. Historically, sales returns have not been material. 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. The Company must assess the likelihood that the gross deferred tax assets, net of any deferred tax liabilities will be recovered from future taxable income and to the extent that we judge that recovery is not likely, we have established a valuation allowance. Significant management judgement is required in determining this valuation allowance. We have recorded a valuation allowance of approximately $3,777,000 as of April 30, 2004. The valuation allowance is based on our estimates of taxable income and the period over which the net deferred tax assets will be recoverable. Conversely, if certain future events cause management to conclude that it is more likely than not that we will recognize all or a portion of the net deferred tax assets, for which a valuation allowance has been recorded, we would record the estimated net realizable value of the net deferred tax asset at that time and would then recognize income tax expense at a rate equal to our combined Federal and State effective tax rate of approximately 37%. The Company's continued profitability may result in an adjustment to the valuation allowance. 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 5 to 10 percent of the Company's accounts receivable are denominated in currencies other than U.S. dollars. At present, the Company does not purchase forward contracts as hedging instruments, but 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 31(a) Rule 13a-14a(a) Certification of Robert V. Tarantino. 31(b) Rule 13a-14a(a) Certification of Mark E. Maddocks 32(a) Section 1350 Certification of Robert V. Tarantino (furnished not filed) 32(b) Section 1350 Certification of Mark E. Maddocks (furnished not filed) 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: December 9, 2004 By: __________________________ Mark E. Maddocks Vice President, Finance (Principal Financial Officer)