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 10/31/98 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 4, 1998, there were 5,562,810 shares outstanding. PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Dataram Corporation And Subsidiary Consolidated Balance Sheets October 31, 1998 and April 30, 1998 (Unaudited) (Audited) October 31, 1998 April 30, 1998 Assets Current Assets: Cash and cash equivalents $ 9,231,343 $ 7,529,906 Trade receivables, less allowance for doubtful accounts and sales returns of $450,000 at October 31, 1998 and at April 30, 1998 8,200,482 10,075,838 Inventories 3,748,130 2,923,165 Other current assets 626,941 493,013 __________ __________ Total current assets 21,806,896 21,021,922 Property and equipment, at cost: Land 875,000 875,000 Machinery and equipment 9,447,266 8,805,875 __________ __________ 10,322,266 9,680,875 Less: accumulated depreciation and amortization 6,869,979 6,245,979 __________ __________ Net property and equipment 3,452,287 3,434,896 Other assets 10,380 7,380 __________ __________ $ 25,269,563 $ 24,464,198 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,203,791 $ 4,698,786 Accrued liabilities 1,665,480 1,548,315 Income taxes payable 134,693 236,116 __________ __________ Total current liabilities 5,003,964 6,483,217 Deferred income taxes 1,013,000 1,013,000 Stockholders' Equity: Common stock, par value $1.00 per share. Authorized 18,000,000 shares; issued 5,562,810 at October 31, 1998 and issued and outstanding 2,781,405 at April 30, 1998 5,562,810 2,781,405 Additional paid in capital 0 2,125,871 Retained earnings 14,112,530 12,060,705 Treasury stock, at cost (69,400 shares) (422,741) 0 __________ __________ Total stockholders' equity 19,252,599 16,967,981 __________ __________ $ 25,005,146 $ 24,464,198 ========== ========== See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiary Consolidated Statements of Earnings Three and Six Months Ended October 31, 1998 and 1997 (Unaudited) 1998 1997 2nd Quarter Six Months 2nd Quarter Six Months Revenues $ 16,261,859 $ 34,012,021 $ 20,067,735 $ 38,215,027 Costs and expenses: Cost of sales 11,095,422 23,365,271 15,402,781 30,037,758 Engineering and development 371,824 703,434 301,389 524,967 Selling, general and administrative 2,810,081 5,747,042 2,908,762 5,188,921 __________ __________ __________ __________ 14,277,327 29,815,747 18,612,932 35,751,646 Earnings from operations 1,984,532 4,196,274 1,454,803 2,463,381 Other income (expense), net Other income, net 0 0 0 2,000 Interest income, net 135,588 252,085 75,053 139,747 __________ __________ __________ __________ 135,588 252,085 75,053 141,747 Earnings before income taxes 2,120,120 4,448,359 1,529,856 2,605,128 Income tax provision 830,000 1,741,000 585,000 991,000 __________ __________ __________ __________ Net earnings $ 1,290,120 $ 2,707,359 $ 944,856 $ 1,614,128 ========== ========== ========== ========== Net earnings per share of common stock Basic $ .23 $ .49 $ .16 $ .27 ========== ========== ========== ========== Diluted $ .21 $ .44 $ .15 $ .26 ========== ========== ========== ========== Weighted average number of common shares outstanding Basic 5,543,094 5,552,952 6,004,726 6,055,966 ========== ========== ========= ========= Diluted 6,145,418 6,143,006 6,268,256 6,323,826 ========== ========== ========= ========= See accompanying notes to consolidated financial statements. Dataram Corporation and Subsidiary Consolidated Statements of Cash Flows Six Months Ended October 31,1998 and 1997 (Unaudited) 1998 1997 Cash flows from operating activities: Net earnings $ 2,707,359 $ 1,614,128 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 624,000 250,200 Bad debt expense 113,189 172,992 Changes in assets and liabilities: (Increase) decrease in trade receivables 1,762,167 (1,524,040) (Increase) decrease in inventories (824,965) 1,152,905 (Increase) decrease in other current assets (133,928) 6,825 Increase in other assets (3,000) (1,650) Increase (decrease) in accounts payable (1,494,995) 1,456,588 Increase (decrease)in accrued liabilities 117,165 ( 517,743) (Decrease) in income taxes payable (101,423) 0 __________ __________ Net cash provided by operating activities 2,765,569 2,610,205 __________ __________ Cash flows from investing activities: Purchase of property and equipment (641,391) (1,005,581) __________ __________ Net cash used in investing activities (641,391) (1,005,581) Cash flows from financing activities: Proceeds from sale of common shares under stock option plan 0 57,000 Purchase and cancellation of common stock 0 (1,101,651) Purchase of common stock held in treasury (422,741) 0 __________ __________ Net cash used in financing activities (422,741) (1,044,651) __________ __________ Net increase in cash and cash equivalents 1,701,437 559,973 Cash and cash equivalents at beginning of year 7,529,906 6,835,671 __________ __________ Cash and cash equivalents at end of period $ 9,231,343 $ 7,395,644 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 38,751 $ 37,453 Income taxes $ 1,855,200 $ 923,058 See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements October 31, 1998 and 1997 (Unaudited) Basis of Presentation The information at October 31, 1998 and for the three and six months ended October 31, 1998 and 1997, 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 generally accepted accounting principles. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjuction with the audited financial statements for the year ended April 30, 1998 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Stock Split On November 11, 1998 the Company's Board of Directors announced a two-for-one stock split effected in the form of a dividend for shareholders of record at the close of business on November 23, 1998 and payable December 3, 1998. The accompanying per share amounts in the financial statements have been restated to give retroactive effect to this stock split. The stock split has been charged to additional paid in capital in the amount of $2,125,871 and retained earnings in the amount of $655,534. Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Dataram International Sales Corporation (a Domestic International Sales Corporation (DISC)). All significant intercompany transactions and balances have been eliminated. Cash and cash equivalents Cash and cash equivalents consist of unrestricted cash, money market preferred stock and commercial paper with original maturities of three months or less. Inventory valuation Inventories are valued at the lower of cost or market, with costs determined by the first-in, first-out method. Inventories at October 31, 1998 and April 30, 1998 consist of the following categories: October 31, 1998 April 30, 1998 ________________ ______________ Raw material $ 2,150,000 $ 1,759,000 Work in process 105,000 61,000 Finished goods 1,493,000 1,103,000 ________________ ______________ $ 3,748,000 $ 2,923,000 ================ ============== Property and equipment Property and equipment is recorded at cost. Depreciation is generally computed on the straight-line basis. Depreciation rates are based on the estimated useful lives which range from three to five years for machinery and equipment. When property or equipment is retired or otherwise disposed of, related costs and accumulated depreciation are removed from the accounts. Repair and maintenance costs are charged to operations as incurred. Revenue recognition Revenue from product sales is recognized when the related goods are shipped to the customer and all significant obligations of the Company have been satisfied. Estimated warranty costs are accrued. Product development and related engineering The Company expenses product development and related engineering costs as incurred. Engineering effort is directed to development of new or improved products as well as ongoing support for existing products. Income taxes The Company follows the asset and liability method of accounting for income taxes in accordance with the provisions of Statement of Financial Accounting Standards SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. Concentration of credit risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents in financial institutions and brokerage accounts. To the extent that such deposits exceed the maximum insurance levels, they are uninsured. The Company performs ongoing evaluations of its customers' financial condition, as well as general economic conditions and, generally, requires no collateral from its customers. 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. Long-term debt During the second quarter of fiscal 1999, the Company amended and restated its credit facility with its bank. Under the amended agreement, the Company modified certain financial covenants and increased the revolving credit facility to $12,000,000 until October 31, 1999, at which point it will decrease to $6,000,000 until October 31, 2000. The agreement provides for Eurodollar rate loans, CD rate loans and base rate loans at an interest rate no higher than the bank's base commercial lending rate less 1/2%. The Company is required to pay a commitment fee equal to 1/16 of one percent per annum on the unused commitment. The agreement contains certain restrictive financial covenants including a minimum current ratio, minimum tangible net worth requirement, minimum interest coverage ratio, maximum debt to equity ratio and certain other covenants, as defined by the agreement. There were no borrowings during fiscal 1999 and 1998. As of October 31, 1998, the amount available for borrowing under the revolving credit facility was $12,000,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources As of October 31, 1998, working capital amounted to $16.8 million reflecting a current ratio of 4.4 compared to working capital of $14.5 million and a current ratio of 3.2 as of April 30, 1998. During fiscal 1999, the Company amended and restated its $12 million unsecured revolving credit line with its bank. The credit facility was unused during fiscal 1999. Annually, $6 million of the facility is scheduled to expire. The Company intends to renew any expiring portion of the facility by the expiration date and maintain a $12 million total facility. Management believes that its working capital together with internally generated funds and its bank line of credit are adequate to finance the Company's operating needs and future capital requirements. Year 2000 The Company's products are all year 2000 compliant. The Company has completed its upgrade of its manufacturing, accounting, production and inventory control systems and software and these systems and software are now year 2000 compliant. The Company has numerous personal computers and peripheral devices used in information technology and non-information technology applications which are currently being tested for year 2000 compliance. The Company intends to upgrade or replace any non year 2000 compliant devices by the end of the current fiscal year. Management estimates that the financial impact of the upgrade will not have a material effect on the Company's consolidated financial condition, results of operations and liquidity. As part of the Company's Year 2000 readiness program, the Company has identified its key vendors and suppliers and is attempting to ascertain their stage of year 2000 readiness primarily through questionaires and interviews. The Company has a diverse and ever changing customer base, with no single customer typically accounting for 10% or more of its revenue. At this time, the Company has no plans to ascertain the stage of year 2000 readiness of its current customers. The possible consequences of the Company, its key vendors, certain customers, governments or government agencies, financial institutions, utilities, etc. of not being year 2000 compliant by January 1, 2000 include but are not limited to, among other things, a temporary plant closing, delays in the delivery of products, delays in collection of recievables, and inventory and supply obsolescence. Because of the widespread nature of this problem, no assurances can be made that the Company will not be materially adversely affected by a temporary inability of the Company to conduct its business in the ordinary course for a period of time after January 1, 2000. However, management believes that the actions it has taken should significantly reduce the adverse effect any such disruptions may have. Results of Operations Revenues for the three month period ending October 31, 1998 were $16,262,000 compared to revenues of $20,068,000 for the comparable prior year period. Fiscal 1999 six month revenues totaled $34,012,000 versus six month revenues of $38,215,000 for the prior fiscal year. The decrease in revenues was the result of declining average selling prices for the Company's products reflecting a decrease in the price of dynamic random access memory chips (DRAMs)which are the primary raw material in memory boards, offset by increased unit volume. Cost of sales for the second quarter and six months of fiscal 1998 were 68% and 69%, respectively of revenues versus 77% and 79% for the same prior year periods. The decrease in cost of sales as a percentage of revenues is attributable to favorable product mix as users continue to shift from 16 megabit based product to higher capacity 64 megabit product which command more favorable margins. Engineering and development costs in fiscal 1999's second quarter and six months were $372,000 and $703,000, respectively versus $301,000 and $525,000 for the same prior year periods. The Company intends to maintain its commitment to the timely introduction of new memory products as new workstations and computers are introduced. Selling, general and administrative costs in this year's second quarter and six months increased to 17% of revenues from 14% for the same prior year periods. Three month total expenditures decreased by $99,000 from the comparable prior year period. Six month selling, general and administrative costs increased by $558,000 in fiscal 1999 versus fiscal 1998. Fiscal 1998 S,G&A costs included legal expenses incurred related to a Complaint filed by Sun Microsystems, Inc., which has since been resolved. The increase in six month costs is primarily attributable to an expansion of the Company's sales force initiated in the beginning of fiscal 1998 as well as an increase in certain marketing and promotional programs, offset by the reduction in legal expense. Other income (expense),net for the second quarter and six months of fiscal 1999 and 1998 consisted primarily of interest income on short term investments. Safe Harbor Statement 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. PART II: OTHER INFORMATION ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits 27 (a). Financial Data Schedule 28 (a). Press Release reporting results of Second Quarter, Fiscal Year 1999 (Attached). 28 (b). Amendment to revolving line of credit agreement (Attached). B. Reports on Form 8-K No reports on Form 8-K have been filed during the current quarter. 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 Date: By: MARK E. MADDOCKS ______________________ ________________________ Mark E. Maddocks Vice President, Finance (Principal Financial Officer)