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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)