UNITED STATES 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 January 31, 2009 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) (609) 799-0071 _____________________________________________________________________________ (Registrant's telephone number, including area code) (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. [X] Yes [ ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definitions of "accelerated filer and large accelerated filer" in Rule 12b of the Exchange Act. (Check One): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock ($1.00 par value): As of March 10, 2009, there were 8,869,184 shares outstanding. PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Dataram Corporation and Subsidiaries Consolidated Balance Sheets January 31, 2009 and April 30, 2008 January 31, 2009 April 30, 2008 (Unaudited) (Note 1) Assets Current Assets: Cash and cash equivalents $ 15,136,427 $ 17,641,690 Accounts receivable, less allowance for doubtful accounts and sales returns of $290,000 at January 31, 2009 and $250,000 at April 30, 2008 2,571,381 4,047,317 Inventories 1,633,663 1,977,393 Deferred income taxes 269,099 1,100,866 Other current assets 194,633 98,051 __________ __________ Total current assets 19,805,203 24,865,317 Deferred income taxes 2,640,450 480,450 Property and equipment, at cost: Machinery and equipment 11,523,003 11,074,596 Leasehold improvements 2,153,688 2,103,688 __________ __________ 13,676,691 13,178,284 Less: accumulated depreciation and amortization 12,748,324 12,492,558 __________ __________ Net property and equipment 928,367 685,726 Other assets 127,344 78,771 __________ __________ $ 23,501,364 $ 26,110,264 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 648,789 $ 1,789,105 Accrued liabilities 740,114 701,862 __________ __________ Total current liabilities 1,388,903 2,490,967 Stockholders' Equity: Common stock, par value $1.00 per share. Authorized 54,000,000 shares; issued and outstanding 8,869,184 at January 31, 2009 and April 30, 2008 8,869,184 8,869,184 Additional paid-in capital 6,922,845 6,407,500 Retained earnings 6,320,432 8,342,613 __________ __________ Total stockholders' equity 22,112,461 23,619,297 __________ __________ $ 23,501,364 $ 26,110,264 ========== ========== See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiaries Consolidated Statements of Operations Three and Nine Months Ended January 31, 2009 and 2008 (Unaudited) 2009 2008 3rd Quarter Nine Months 3rd Quarter Nine Months Revenues $ 5,635,417 $ 20,257,573 $ 6,675,545 $ 23,848,470 Costs and expenses: Cost of sales 3,896,056 13,491,649 4,031,565 14,924,604 Engineering 298,190 932,403 313,463 900,544 Research and development 574,275 1,040,625 0 0 Selling, general and administrative 2,639,049 8,322,181 2,116,578 6,716,735 __________ __________ __________ __________ 7,407,570 23,786,858 6,461,606 22,541,883 Earnings (loss) from operations (1,772,153) (3,529,285) 213,939 1,306,587 Other income Interest income, net 86,337 276,345 194,582 597,069 Currency gain (loss) 5,304 (57,328) 38,665 84,113 Other income (expense), net 0 (1,912) 0 0 __________ __________ __________ __________ Total other income 91,641 217,105 233,247 681,182 Earnings (loss) before income taxes (1,680,512) (3,312,180) 447,186 1,987,769 Income tax expense (benefit) (657,000) (1,290,000) 214,000 780,000 __________ __________ __________ __________ Net earnings (loss) $ (1,023,512) $ (2,022,180) $ 233,186 $ 1,207,769 ========== ========== ========== ========== Net earnings (loss) per share of common stock Basic $ (.12) $ (.23) $ .03 $ .14 ========== ========== ========== ========== Diluted $ (.12) $ (.23) $ .03 $ .14 ========== ========== ========== ========== Dividends per common share $ .00 $ .00 $ .06 $ .18 ========== ========== ========== ========== See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries Consolidated Statements of Cash Flows Nine Months Ended January 31, 2009 and 2008 (Unaudited) 2009 2008 Cash flows from operating activities: Net earnings (loss) $(2,022,180) $ 1,207,769 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 263,000 256,001 Bad debt expense (recovery) 192,620 (19,490) Stock-based compensation expense 394,045 231,421 Other stock option expense 121,300 0 Loss on sale of property and equipment 1,912 707 Deferred income tax expense (benefit) (1,328,234) 462,549 Excess tax benefits from sale of common shares under stock option plan 0 (82,000) Changes in assets and liabilities: Decrease in accounts receivable 1,283,316 2,107,537 Decrease in inventories 343,730 410,992 Decrease (increase)in other current assets (96,582) 23,628 Decrease (increase)in other assets (48,573) 26,217 Decrease in accounts payable (1,140,316) (839,679) Increase (decrease)in accrued liabilities 38,252 (242,174) __________ __________ Net cash provided by (used in) operating activities (1,997,710) 3,543,478 ___________ __________ Cash flows from investing activities: Collection of note receivable 0 1,537,500 Additions to property and equipment (508,053) (81,761) Proceeds from sale of property and equipment 500 21,333 ___________ __________ Net cash provided by (used in) investing activities (507,553) 1,477,072 ___________ __________ Cash flows from financing activities: Net proceeds from sale of common shares under stock option plan 0 496,632 Excess tax benefits from sale of common shares under stock option plan 0 82,000 Dividends paid 0 (1,581,636) ___________ __________ Net cash used in financing activities 0 (1,003,004) ___________ __________ Net increase (decrease) in cash and cash equivalents (2,505,263) 4,017,546 Cash and cash equivalents at beginning of period 17,641,690 14,138,223 __________ __________ Cash and cash equivalents at end of period $ 15,136,427 $ 18,155,769 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 4,774 $ 4,774 ========== ========== Income taxes $ 19,696 $ 114,000 ========== ========== See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiaries Notes to Consolidated Financial Statements January 31, 2009 and 2008 (Unaudited) (1) Basis of Presentation The information for the three and nine months ended January 31, 2009 and 2008 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended April 30, 2008 included in the Company's 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The April 30, 2008 consolidated balance sheet has been derived from these statements. (2) Summary of Significant Accounting Policies 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. Net Earnings (Loss) Per Share Net earnings (loss) per share is presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted average number of shares of common stock issued and outstanding during the period. The calculation of diluted loss per share for the three and nine months ended January 31, 2009, includes only the weighted average number of common stock outstanding. The denominator excludes the dilutive effect of stock options outstanding as their effect would be anti-dilutive. For purposes of calculating basic earnings per share for the three and nine months ended January 31, 2008, the denominator includes both the weighted average number of shares of common stock plus the dilutive effect of stock options outstanding. The following presents a reconciliation of the numerator and denominator used in computing basic and diluted net earnings (loss) per share for fiscal 2009 and 2008: Three Months ended January 31, 2009 Loss Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net loss per share - -net loss and weighted average common shares outstanding $(1,023,512) 8,869,184 $ (.12) Effect of dilutive securities - -stock options - - - ________ _________ ______ Diluted net loss per share - -net loss, weighted average common shares outstanding and effect of stock options $(1,023,512) 8,869,184 $ (.12) ======== ========= ====== Three Months ended January 31, 2008 Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 233,186 8,869,184 $ .03 Effect of dilutive securities - -stock options - 5,507 - _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 233,186 8,874,691 $ .03 ======== ========= ====== Diluted net loss per share does not include the effect of all options to purchase shares of common stock for the three months ended January 31, 2009 because they are anti-dilutive. Diluted net earnings per share does not include the effect of options to purchase 826,725 shares of common stock for the three months ended January 31, 2008 because they are anti-dilutive. Nine Months ended January 31, 2009 Loss Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net loss per share - -net loss and weighted average common shares outstanding $(2,022,180) 8,869,184 $ (.23) Effect of dilutive securities - -stock options - - - _______ _________ ______ Diluted net loss per share - -net loss, weighted average common shares outstanding and effect of stock options $(2,022,180) 8,869,184 $ (.23) ======== ========= ====== Nine Months ended January 31, 2008 Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $1,207,769 8,810,690 $ .14 Effect of dilutive securities - -stock options - 39,952 - _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $1,207,769 8,850,642 $ .14 ======== ========= ====== Diluted net loss per share does not include the effect of all options to purchase shares of common stock for the nine months ended January 31, 2009 because they are anti-dilutive. Diluted net earnings per share does not include the effect of options to purchase 740,555 shares of common stock for the nine months ended January 31, 2008 because they are anti-dilutive. Dividends No cash dividends were paid in the three and nine months ended January 31, 2009. Cash dividends paid in the three and nine months ended January 31, 2008 were $532,151 and $1,581,636, respectively. Common Stock Repurchases On December 4, 2002, the Company's Board of Directors authorized a stock repurchase plan pursuant to which the Company was authorized to repurchase a total of 500,000 shares of its common stock. For the nine months ended January 31, 2009 and 2008, the Company did not repurchase any shares of its common stock. As of January 31, 2009, 172,196 shares remain available for repurchase under the plan. This repurchase program does not have an expiration date. Stock-Based Compensation The Company has a 1992 incentive and non-statutory stock option plan for the purpose of permitting certain key employees to acquire equity in the Company and to promote the growth and profitability of the Company by attracting and retaining key employees. In general, the plan allowed granting of up to 2,850,000 shares, adjusted for stock splits, 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. Under option agreements granted under the plan, 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. No further options may be granted under this plan. The Company also has a 2001 incentive and non-statutory stock option plan for the purpose of permitting certain key employees to acquire equity in the Company and to promote the growth and profitability of the Company by attracting and retaining key employees. In general, the plan allows granting of up to 1,800,000 shares of the Company's common stock at an option price to be no less than the fair market value of the Company's common stock on the date such options are granted. Currently, options granted under the plan vest ratably on the annual anniversary date of the grants. Vesting periods for options currently granted under the plan range from one to five years. The Company periodically grants nonqualified stock options to non-employee 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 non-employee directors are exercisable at a price representing the fair value at the date of grant, and expire either five or ten years after date of grant. Of each option, 100% are exercisable one year after the date of grant. New shares of the Company's common stock are issued upon exercise of stock options. Prior to May 1, 2006, as permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"), compensation cost for stock options was recognized using the intrinsic value method described in APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Effective May 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment," ("SFAS 123R") and Securities and Exchange Commission Staff Accounting Bulletin No. 107. Under SFAS 123R, the fair value of options granted is amortized over the related service period. SFAS 123R was adopted using the modified prospective transition method; therefore, prior periods have not been restated. Compensation expense recognized in the three and nine months ended January 31, 2009 includes compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Compensation cost for any share-based payments granted subsequent to May 1, 2006 has been based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. As a result of adopting SFAS 123R, the Company's loss before taxes and net loss for fiscal 2009's three and nine months ended January 31, 2009 are higher by approximately $138,000 and $84,000, and $394,000 and $240,000, respectively than if we had continued to account for stock-based compensation under APB 25. Fiscal 2008's three and nine months earnings before taxes and net earnings were approximately $66,000 and $40,000 lower, and $231,000 and $141,000 lower, respectively, than if the Company had continued to account for stock-based compensation under APB 25. Fiscal 2009's and fiscal 2008's stock-based compensation expense was recognized in the selling, general and administrative expense line item of the accompanying consolidated statements of operations on a ratable basis over the vesting periods. We measure the fair value of stock options using the Black-Scholes option pricing model based upon the market price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. Stock-based compensation expense is amortized over the applicable vesting period of the stock option grants, which generally ranges from one to five years. These stock option grants have been classified as equity instruments, and as such, a corresponding increase of approximately $394,000 has been reflected in additional paid-in capital in the accompanying balance sheet as of January 31, 2009. A summary of option activity under the plans for the nine months ended January 31, 2009 is as follows: Weighted average Weighted average Aggregate exercise price remaining contractual intrinsic Shares life value(1) __________ ________________ _____________________ __________ Balance April 30, 2008 899,000 $5.69 3.64 $ 26,000 Granted(2) 368,000 $2.65 8.73 - Exercised - - - - Expired - - - - Balance January 31, 2009 1,267,000 $4.81 4.60 - Exercisable January 31, 2009 869,000 $5.71 2.77 - Expected to vest January 31, 2009 1,247,000 $4.81 4.60 - (1)These amounts represent the difference between the exercise price and $1.30, the closing price of Dataram common stock on January 30, 2009 as reported on the NASDAQ Stock Market, for all in-the-money options outstanding. For exercised options, intrinsic value represents the difference between the exercise price and the closing price of Dataram common stock on the date of exercise. (2) The fair value of the stock options granted during the current fiscal year ranges between $1.60 and $2.99 and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected life ranges between 5 and 10 years; expected volatility of 110%; expected forfeiture rate of 5%; expected dividend of zero; and a risk-free interest rate of 4.0%. Total cash received from the exercise of options in the fiscal 2009's first nine months ended January 31, 2009 was nil. As of January 31, 2009, there was $628,000 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted average period of approximately one and one-half years. At January 31, 2009, an aggregate of 783,902 shares were authorized for future grant under the Company's stock option plans. b. Other Stock Option Expense During fiscal 2009's first quarter, the Company granted options to purchase 50,000 shares of the Company's common stock to a privately held company in exchange for certain patents and other intellectual property. The options granted are exercisable at a price representing the fair value at the date of grant, are 100% exercisable on the date of grant and expire ten years after date of grant. The calculated fair value of these options was approximately $121,000 and was determined using the Black-Scholes option pricing model based upon the market price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends, using an expected quarterly dividend rate of zero, a calculated volatility factor of 110% and risk-free interest rate of 4.0%. The expected term of these options is the same as the contractual term. Such calculated fair value has been charged in its entirety to the research and development expense line item in the accompanying consolidated statement of operations for this grant as of January 31, 2009. These stock option grants have been classified as equity instruments, and as such, a corresponding increase of approximately $121,000 has been reflected in additional paid-in capital in the accompanying balance sheet as of January 31, 2009. (2) Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted cash, money market funds and commercial paper with purchased maturities of three months or less when acquired. (3) Accounts Receivable Accounts receivable consists of the following categories: January 31, 2009 April 30, 2008 ________________ ______________ Trade receivables $ 2,503,000 $ 4,173,000 VAT receivable 358,000 124,000 Allowance for doubtful accounts and sales returns (290,000) (250,000) ________________ ______________ $ 2,571,000 $ 4,047,000 ================ ============== (4) Inventories Inventories are valued at the lower of cost or market, with costs determined by the first-in, first-out method. Inventories at January 31, 2009 and April 30, 2008 consist of the following categories: January 31, 2009 April 30, 2008 ________________ ______________ Raw materials $ 1,121,000 $ 1,379,000 Work in process 11,000 65,000 Finished goods 502,000 533,000 ________________ ______________ $ 1,634,000 $ 1,977,000 ================ ============== (5) 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 nine month periods ended January 31, 2009 and 2008 by geographic region are as follows: Three months ended Nine months ended January 31, 2009 January 31, 2009 ________________ ________________ United States $ 3,426,000 $ 14,581,000 Europe 1,518,000 4,039,000 Other (principally Asia Pacific Region) 691,000 1,638,000 ________________ ________________ Consolidated $ 5,635,000 $ 20,258,000 ================ ================ Three months ended Nine months ended January 31, 2008 January 31, 2008 ________________ ________________ United States $ 4,839,000 $ 17,078,000 Europe 1,234,000 4,726,000 Other (principally Asia Pacific Region) 603,000 2,044,000 _______________ ________________ Consolidated $ 6,676,000 $ 23,848,000 ================ ================ Long-lived assets consist of property and equipment. Long-lived assets and total assets by geographic region as of January 31, 2009 are as follows: January 31, 2009 Long-lived assets Total assets _________________ ______________ United States $ 928,000 $ 23,464,000 Europe 0 32,000 Other 0 5,000 _________________ ______________ Consolidated $ 928,000 $ 23,501,000 ================= ============== (6) Significant New Accounting Pronouncements Recently Adopted Accounting Pronouncements In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS No. 159 gives the Company the irrevocable option to carry many financial assets and liabilities at fair values, with changes in fair value recognized in earnings. SFAS No. 159 was effective for the Company beginning May 1, 2008. The Company has reviewed the provisions of SFAS No. 159, and has determined that as of January 31, 2009 that the provisions of SFAS No. 159 do not apply to any of the Company's assets or liabilities. In the event that the Company acquires any future assets or liabilities which would be subject to the provisions of SFAS No. 159, the Company will make an election relative to those assets or liabilities at the time of acquisition. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS No. 161), which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our consolidated financial position, financial performance, and cash flows. SFAS No. 161 was effective for us beginning January 1, 2009. The Company does not own any derivative instruments nor does it participate in hedging activity. Recent Accounting Pronouncements Not Yet Adopted In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" (SFAS No. 141R), which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning May 1, 2009 and will apply prospectively to business combinations completed on or after that date. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" (SFAS No. 160), which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning May 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company has no minority or noncontrolling interests as defined in SFAS No. 160. (7) Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables. 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. In regard to trade receivables, the Company performs ongoing evaluations of its customers' financial condition, as well as general economic conditions and, generally, requires no collateral from its customers. 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, pricing and availability of raw materials 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. Executive Overview Dataram 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, HP, IBM and Sun Microsystems. The Company also manufactures a line of memory products for Intel and AMD motherboard based servers. The Company's memory products are sold worldwide to OEMs, 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 OEMs mentioned above. The primary raw material used in producing memory boards is dynamic random access memory (DRAM) chips. The purchase cost of DRAMs is the largest single component 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 January 31, 2009, cash and cash equivalents amounted to $15.1 million and working capital amounted to $18.4 million, reflecting a current ratio of 14.3, compared to cash and cash equivalents of $17.6 million and working capital of $22.4 million and a current ratio of 10.0 as of April 30, 2008. During the first nine months of fiscal year 2009, net cash used in operating activities totaled approximately $1,998,000. Net loss in the nine-month period was approximately $2,022,000. Deferred income taxes increased by $1,328,000 and accounts payable decreased by $1,140,000. Cash used in operating activities was partially offset by a decrease in accounts receivable of approximately $1,283,000 and by a decrease in inventory of approximately $344,000. Depreciation expense of approximately $263,000 and non-cash stock-based expense of approximately $515,000 were also recorded. Net cash used in investing activities totaled approximately $508,000 for the nine months ended January 31, 2009. This was primarily the result of fixed asset additions. The bulk of these additions were for test equipment used in the Company's manufacturing process. On June 21, 2004, the Company entered into a credit facility with a bank, which provided for up to a $5 million revolving credit line. The Company was required to pay a fee equal to one-eighth of one percent per annum on the unused commitment. There have been no borrowings against the credit line. On February 23, 2009, the Company canceled this agreement. Management believes that the Company's existing cash resources will be sufficient to meet short-term liquidity needs. Management further believes that its working capital is adequate to finance the Company's long-term operating needs and future capital requirements. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2008 are as follows: Operating leases Year ending April 30: ________________ 2009 $ 411,000 2010 418,000 2011 371,000 2012 34,000 Thereafter 0 ______________ Total minimum lease payments $ 1,234,000 ============== The Company has no other material commitments. Results of Operations Revenues for the three-month period ended January 31, 2009 were $5,635,000 compared to revenues of $6,676,000 for the comparable prior year period, a decrease of approximately 16%. Fiscal 2009 nine-month revenues totaled $20,258,000 versus nine-month revenues of $23,848,000 in the prior year, a decrease of approximately 15%. Our revenues in the third quarter of the current fiscal year have been negatively impacted by current economic conditions. Many of our customers have curtailed or temporarily suspended their capital spending while they adapt their business plans to the current environment. Revenues for the three and nine month periods ended January 31, 2009 and 2008 by geographic region are as follows: Three months ended Nine months ended January 31, 2009 January 31, 2009 ________________ ________________ United States $ 3,426,000 $ 14,581,000 Europe 1,518,000 4,039,000 Other (principally Asia Pacific Region) 691,000 1,638,000 ________________ ________________ Consolidated $ 5,635,000 $ 20,258,000 ================ ================ Three months ended Nine months ended January 31, 2008 January 31, 2008 ________________ ________________ United States $ 4,839,000 $ 17,078,000 Europe 1,234,000 4,726,000 Other (principally Asia Pacific Region) 603,000 2,044,000 ________________ ________________ Consolidated $ 6,676,000 $ 23,848,000 ================ ================ Cost of sales for the third quarter and nine months were 69% and 67% of revenues, versus 60% and 63% for the same respective prior year periods. Fluctuations in cost of sales as a percentage of revenues 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. Cost of sales in the third quarter and nine months were $3,896,000 and $13,492,000, respectively, compared to $4,032,000 and $14,925,000 in the prior year comparable periods. Engineering expense in fiscal 2009's third quarter and nine months were $298,000 and $932,000, respectively, versus $313,000 and $901,000 for the same respective prior year periods. Engineering expense excludes expenses incurred for research and development into new product areas. Research and development expense in fiscal 2009's third quarter and nine months were $574,000 and $1,041,000, respectively, versus nil in the same prior year periods. In the current fiscal year, the Company has implemented a strategy to introduce new and complementary products into its offerings portfolio. The Company is currently focusing on the development of certain high performance storage products. As part of that strategy, in January, 2009, the Company entered into a software purchase and license agreement with another company whereby the Company has the exclusive right to purchase specified software for a price of $900,000 plus a contingent payment of $100,000. Third quarter research and development expense includes $300,000 of expense related to a payment for the software purchase and license. The software and the storage product, which incorporates the software is currently under development and is not deemed saleable at the present time. Should the Company elect to continue with the development project, the Company must make two additional $300,000 payments no later than six and twelve months, respectively from the date of the agreement, at which point the Company will own the software. Nine month research and development expense includes a charge of approximately $121,000 recorded in this year's fiscal first quarter representing a non-cash expense for the fair value of stock options issued to a privately held company to acquire certain patents and other intellectual property. These patents and other intellectual property were deemed to have no alternative future use when acquired and we had an uncertainty in receiving future economicbenefits from them. Selling, general and administrative (S,G&A) expense in fiscal 2009's third quarter and nine months increased by $522,000 and $1,605,000 respectively, from the comparable prior year periods. Current year third quarter expense includes $180,000 of severance expense for a terminated employee. Additionally, the Company's bad debt and sales returns and allowance expense is approximately $96,000 higher in this year's third quarter when compared to the prior year third quarter. This is primarily due to management's assessment of the increased inherent risk in carrying accounts receivable in the current economic environment. Stock based compensation expense is approximately $72,000 higher in the third quarter of this fiscal year when compared to the comparable prior year period. The balance of the year over year third quarter increase consists primarily of increased sales and marketing expenditures totaling approximately $174,000. Nine month S,G&A expense includes a charge of approximately $716,000 related to a retirement agreement entered into with the Company's former chief executive officer. Of this amount, approximately $660,000 relates to payments defined in the agreement and the balance consists primarily of legal fees incurred by the Company associated with this matter. Stock-based compensation expense is recorded as a component of S,G&A expense and totaled $138,000 and $394,000, respectively, in the third quarter and nine months, compared to $66,000 and $231,000 in the comparable prior year periods. Other income, net for the third quarter and nine months totaled $92,000 and $217,000, respectively, for fiscal 2009 and $233,000 and $681,000, for the same respective periods in fiscal 2008. Other income in fiscal 2009's third quarter consisted primarily of $86,000 of net interest income received. Additionally, other income included $5,000 of foreign currency gain, primarily as a result of the EURO strengthening relative to the US dollar. Fiscal 2009's nine months other income consisted primarily of $276,000 of net interest income received and $57,000 of foreign currency loss, primarily as a result of the EURO weakening relative to the US dollar. Other income in fiscal 2008's third quarter consisted primarily of $195,000 of net interest income. Additionally, there was $39,000 of foreign currency gain, primarily as a result of the EURO strengthening relative to the US dollar. Other income in fiscal 2008's nine months consisted primarily of $597,000 of net interest income. Additionally, there was $84,000 of foreign currency gain, primarily as a result of the EURO strengthening relative to the US dollar. Income tax expense (benefit) for the third quarter and nine months of fiscal 2009 was a benefit of $657,000 and $1,290,000 respectively, versus expense of $214,000 and $780,000 for the same prior year periods. The Company's effective tax rate for financial reporting purposes in fiscal 2009 is approximately 38.8%. However, the Company has Federal NOL carry-forwards totaling approximately $1.6 million and therefore will continue to make cash payments for income taxes at an approximate rate of 8.0% of pretax earnings until it utilizes all of its NOL carry-forwards. 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, 2008, the Company believes the following accounting policies to be critical: Revenue Recognition - Revenue is recognized when title passes upon shipment of goods to customers. The Company's revenue earning activities involve delivering or producing goods. The following criteria are met before revenue is recognized: persuasive evidence of an arrangement exists, shipment has occurred, selling price is fixed or determinable and collection is reasonably assured. The Company does experience a minimal level of sales returns and allowances for which the Company accrues a reserve at the time of sale in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists". Estimated warranty costs are accrued by management upon product shipment based on an estimate of future warranty claims. Stock Option Expense - In December 2004, SFAS No. 123 (revised 2004), "Share-Based Payment"("SFAS 123(R)") was issued. SFAS 123(R) revises SFAS 123 and supersedes APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123, as originally issued in 1995, established as preferable a fair value-based method of accounting for share-based payment transactions with employees. However, SFAS 123 as amended permitted entities the option of continuing to apply the intrinsic value method under APB 25 that the Company had been using, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair value-based method been used. SFAS 123(R) requires that the compensation cost relating to all share-based payment transactions, including employee stock options, be recognized in the historical financial statements. That cost is measured based on the fair value of the equity or liability instrument issued and amortized over the related service period. The Company adopted the guidance in SFAS 123(R) effective May 1, 2006. As such, the accompanying consolidated statement of operations for fiscal 2009's third quarter and nine months ended January 31, 2009 includes approximately $138,000 and $394,000, of compensation expense, respectively, in the selling, general and administrative expense line item related to the fair value of options granted to employees and directors under the Company's stock-based employee compensation plans which is being amortized over the service period in the consolidated financial statements, as required by SFAS 123(R). These awards have been classified as equity instruments, and as such, a corresponding increase of approximately, $394,000 has been reflected in additional paid-in capital in the accompanying consolidated balance sheet as of January 31, 2009. Fiscal 2008's third quarter and nine months ended January 31, 2008 includes approximately $66,000 and $231,000 of compensation expense, respectively in the selling, general and administrative expense line and as such, a corresponding increase of approximately, $231,000 has been reflected in additional paid-in capital in the accompanying consolidated balance sheet as of January 31, 2008. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected life is based on the Company's historical experience of option exercises relative to option contractual lives; Expected volatility is based on the historical volatility of the Company's share price; Expected dividend yield assumes the current dividend rate remains unchanged; Risk free interest rate approximates United States government debt rates at the time of option grants. Research and Development Expense - All research and development costs are expensed as incurred, including Company-sponsored research and development and costs of patents and other intellectual property that have no alternative future use when acquired and in which we had an uncertainty in receiving future economic benefits. 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. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers certain tax planning strategies in its assessment as to the recoverability of its tax assets. 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 DISCLOSURES ABOUT MARKET RISK. The Company does not invest in market risk sensitive instruments. The Company's investments consist of overnight deposits with banks, money market accounts and commercial paper, which matures within ninety days. The ompany's rate of return on its investment portfolio changes with short-term interest rates, although such changes will not affect the value of its portfolio. The Company's objective 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 could do so as circumstances warrant. ITEM 4T. CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended January 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II: OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. None. Item 1A. RISK FACTORS. No material changes from Annual Report on Form 10-K. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. No reportable event. Item 3. DEFAULTS UPON SENIOR SECURITIES. No reportable event. Item 4. OTHER INFORMATION. No reportable event. Item 5. EXHIBITS. Exhibit No. Description __________ ___________ 31(a) Rule 13a-14(a) Certification of John H. Freeman 31(b) Rule 13a-14(a) Certification of Mark E. Maddocks. 32(a) Section 1350 Certification of John H. Freeman (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: March 12, 2009 By: /S/ MARK E. MADDOCKS _______________________________ Mark E. Maddocks Vice President, Finance (Principal Financial Officer) Page 8 of 8 Page 8 of 8