SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ X / Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended 7/31/08
_____________
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. [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 September 5, 2008, there were 8,869,184 shares
outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Dataram Corporation and Subsidiaries
Consolidated Balance Sheets
July 31, 2008 and April 30, 2008
(Unaudited)
July 31, 2008 April 30, 2008
Assets
Current Assets:
Cash and cash equivalents $ 16,352,316 $ 17,641,690
Accounts receivable, less allowance
for doubtful accounts and sales returns
of $320,000 at July 31, 2008 and
$250,000 at April 30, 2008 3,789,245 4,047,317
Inventories 2,183,264 1,977,393
Deferred income taxes 1,131,866 1,100,866
Other current assets 357,064 98,051
__________ __________
Total current assets 23,813,755 24,865,317
Deferred income taxes 782,450 480,450
Property and equipment, at cost:
Machinery and equipment 11,340,413 11,074,596
Leasehold improvements 2,103,688 2,103,688
__________ __________
13,444,101 13,178,284
Less: accumulated depreciation
and amortization 12,566,324 12,492,558
__________ __________
Net property and equipment 877,777 685,726
Other assets 142,774 78,771
__________ __________
$ 25,616,756 $ 26,110,264
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,476,090 $ 1,789,105
Accrued liabilities 879,934 701,862
__________ __________
Total current liabilities 2,356,024 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 July 31, 2008
and April 30, 2008 8,869,184 8,869,184
Additional paid-in capital 6,654,493 6,407,500
Retained earnings 7,737,055 8,342,613
__________ __________
Total stockholders' equity 23,260,732 23,619,297
__________ __________
$ 25,616,756 $ 26,110,264
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Operations
Three Months Ended July 31, 2008 and 2007
(Unaudited)
2008 2007
Revenues $ 7,563,076 $ 8,616,887
Costs and expenses:
Cost of sales 4,935,405 5,579,342
Engineering 331,856 301,438
Research and development 212,379 0
Selling, general and administrative 3,183,064 2,314,669
__________ __________
8,662,704 8,195,449
__________ __________
Earnings (loss) from operations (1,099,628) 421,438
Other income:
Interest income, net 110,698 201,371
Currency gain 285 17,834
Other income (expense), net (1,912) 0
` __________ __________
Total other income 109,071 219,205
__________ __________
Earnings (loss) before income taxes (990,557) 640,643
Income tax expense (benefit) (385,000) 235,000
__________ __________
Net earnings (loss) $ (605,557) $ 405,643
========== ==========
Net earnings (loss) per share of common stock
Basic $ (.07) $ .05
========== ==========
Diluted $ (.07) $ .05
========== ==========
Dividends per common share $ .00 $ .06
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended July 31, 2008 and 2007
(Unaudited)
2008 2007
Cash flows from operating activities:
Net earnings (loss) $ (605,557) $ 405,643
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 81,000 96,000
Bad debt expense 70,733 4,766
Stock-based compensation expense 125,693 93,259
Other stock option expense 121,300 0
Loss on sale of property and equipment 1,912 707
Deferred income tax expense (benefit) (333,000) 165,000
Excess tax benefits from sale of
common shares under stock option plan 0 (39,000)
Changes in assets and liabilities:
Decrease in accounts receivable 187,339 144,947
Increase in inventories (205,871) (171,032)
Increase in other current assets (259,013) (197,065)
Decrease (increase) in other assets (64,003) 23,442
Decrease in accounts payable (313,015) (107,979)
Increase (decrease) in accrued liabilities 178,072 (241,530)
__________ __________
Net cash provided by (used in)
operating activities (1,014,410) 177,158
___________ __________
Cash flows from investing activities:
Collection of note receivable 0 1,537,500
Additions to property and equipment (275,464) 0
Proceeds from sale of property and equipment 500 21,333
___________ __________
Net cash provided by (used in)
investing activities (274,964) 1,558,833
___________ __________
Cash flows from financing activities:
Net proceeds from sale of common shares under
stock option plan 0 269,999
Excess tax benefits from sale of common
shares under stock option plan 0 39,000
Dividends paid 0 (522,087)
___________ __________
Net cash used in financing activities 0 (213,088)
___________ __________
Net increase (decrease) in cash and
cash equivalents (1,289,374) 1,522,903
Cash and cash equivalents at
beginning of period 17,641,690 14,138,223
__________ __________
Cash and cash equivalents at
end of period $ 16,352,316 15,661,126
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,597 $ 1,597
========== ==========
Income taxes $ 0 $ 0
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2008 and 2007
(Unaudited)
(1) Basis of Presentation
The information for the three months ended July 31, 2008 and 2007 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, 2008 included in the Company's 2008 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The April 30, 2008
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 quarter ended July 31, 2008, 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 months
ended July 31, 2007, 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 July 31, 2008
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss, weighted
average common shares
outstanding $ (605,557) 8,869,184 $ (.07)
Effect of dilutive securities
- -stock options - - -
_______ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $ (605,557) 8,869,184 $ (.07)
======== ========= ======
Three Months ended July 31, 2007
Earnings Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net earnings per share
- -net earnings and weighted
average common shares
outstanding $ 405,643 8,738,105 $ .05
Effect of dilutive securities
- -stock options - 140,205 .00
_______ _________ ______
Diluted net earnings per share
- -net earnings and weighted
average common shares
outstanding $ 405,643 8,878,310 $ .05
========= ========= ======
Diluted net loss per share does not include the effect of all options to
purchase shares of common stock for the three months ended July 31, 2008
because they are anti-dilutive.
Diluted net earnings per share does not include the effect of options to
purchase 592,200 shares of common stock for the three months ended July 31,
2007 because they are anti-dilutive.
Dividends
Cash dividends, paid in the three months ended July 31, 2008 and 2007 were
nil and $522,087, 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. During the three months ended
July 31, 2008 and 2007, the Company did not repurchase any shares of its
common stock. As of July 31, 2008, 172,196 shares remain available for
repurchase under the plan. This repurchase program does not have an
expiration date.
Stock Option Expense
a. 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. The
Company recognizes compensation expense on a straight-line basis over the
requisite service period for the entire award. SFAS 123R was adopted using
the modified prospective transition method; therefore, prior periods have
not been restated. Compensation cost for any share-based payments granted
subsequent to May 1, 2006 are based on the grant date fair value estimated
in accordance with the provisions of SFAS 123R.
As a result of adopting SFAS 123R, our loss before taxes and net loss for
fiscal 2009's three months ended July 31, 2008 are higher by approximately
$126,000 and $77,000, respectively, than if we had continued to account for
stock-based compensation under APB 25. Fiscal 2008's three months ended
July 31, 2007 earnings before taxes and net earnings were approximately
$93,000 and $59,000 lower, respectively, than if we had continued to account
for stock-based compensation under APB 25. Fiscal 2009's and fiscal 2008's
first quarter 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 options are amortized over their applicable vesting
period, which generally ranges from one to four years. These stock option
grants have been classified as equity instruments, and as such, a
corresponding increase of $126,000 has been reflected in additional paid-in
capital in the accompanying balance sheet as of July 31, 2008.
A summary of option activity under the plans for the three months ended
July 31, 2008 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) 200,000 $3.20 9.75 -
Exercised - - - -
Expired - - - -
Balance
July 31, 2008 1,099,000 $5.24 4.55 -
Exercisable
July 31, 2008 734,000 $6.15 3.08 -
(1) This amount represents the difference between the exercise price and
$2.35, the closing price of Dataram common stock on July 31, 2008 as
reported on the NASDAQ Stock Market, for all in-the-money options
outstanding. There were no in the money options on July 31, 2008.
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 is $2.99 and was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
expected life of 10 years; expected volatility of 110%; expected
dividend yield of zero; expected forfeiture rate of 5%; and a
risk-free interest rate of 4.0%.
Total cash received from the exercise of options in the first quarter
ended July 31, 2008 was nil. As of July 31, 2008, there was $621,000 of
total unrecognized compensation costs related to stock options. These
costs are expected to be recognized over a weighted average period of
approximately three and one-half years. At July 31, 2008, an aggregate of
951,902 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 is
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%. 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 July 31, 2008. These stock option grants
have been classified as equity instruments, and as such, a corresponding
increase of $121,000 has been reflected in additional paid-in capital in the
accompanying balance sheet as of July 31, 2008.
(2) Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash, money market
accounts and commercial paper purchased with maturities of three months or
less when acquired.
(3) Accounts Receivable
Accounts receivable consists of the following categories:
July 31, 2008 April 30, 2008
________________ ______________
Trade receivables $ 4,004,000 $ 4,173,000
VAT receivable 99,000 124,000
Other 6,000 0
Allowance for doubtful accounts
and sales returns (320,000) (250,000)
________________ ______________
$ 3,789,000 $ 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 July 31, 2008 and
April 30, 2008 consist of the following categories:
July 31, 2008 April 30, 2008
________________ ______________
Raw materials $ 1,355,000 $ 1,379,000
Work in process 109,000 65,000
Finished goods 719,000 533,000
________________ ______________
$ 2,183,000 $ 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 months ended July 31, 2008 and 2007 by geographic region are as
follows:
Three months ended Three months ended
July 31, 2008 July 31, 2007
________________ ________________
United States $ 5,574,000 $ 6,389,000
Europe 1,447,000 1,522,000
Other (principally Asia Pacific Region) 542,000 706,000
________________ ________________
Consolidated $ 7,563,000 $ 8,617,000
================ ================
Long-lived assets consist of property and equipment. Long-lived assets and
total assets by geographic region as of July 31, 2008 are as follows:
July 31, 2008
Long-lived assets Total assets
_________________ ______________
United States $ 878,000 $ 25,503,000
Europe 0 107,000
Other 0 7,000
_________________ ______________
Consolidated $ 878,000 $ 25,617,000
================= ==============
(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 is effective for the Company beginning May 1, 2008.
The Company has reviewed the provisions of SFAS No. 159, and has determined
that as of July 31, 2008 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.
Recent Accounting Pronouncements Not Yet Adopted
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 is effective for us beginning
January 1, 2009. We are currently assessing the potential impact that
adoption of SFAS No. 161 may have on our consolidated financial statements.
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 changes the recognition of assets
acquired and liabilities assumed arising from contingencies, 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. We are currently assessing the potential
impact that adoption of SFAS No. 160 may have on our consolidated financial
statements.
(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
July 31, 2008, cash and cash equivalents amounted to $16.4 million and
working capital amounted to $21.5 million, reflecting a current ratio of
10.1, 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 fiscal quarter ended July 31, 2008, net cash used in
operating activities totaled approximately $1,014,000. Net loss in the
period was approximately $606,000. Deferred income taxes increased by
$333,000 and accounts payable decreased by $313,000. Inventory decreased by
approximately $206,000 and other current assets increased by $259,000
primarily due to the prepayment of annual insurance premiums in the first
quarter. Cash used in operating activities was partially offset by
depreciation expense recorded in the quarter of $81,000. Non-cash
stock-based expense of approximately $247,000 was also recorded in the
quarter. Accounts receivable decreased by approximately $187,000. Accrued
liabilities increased by $178,000.
Net cash used in investing activities totaled approximately $275,000 for
the quarter ended July 31, 2008. This was primarily the result of fixed
asset additions in the quarter. 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 provides for up to a $5 million revolving credit line. Advances under
the facility were limited to 75% of eligible receivables, as defined in the
agreement. The agreement provides for LIBOR rate loans and base rate loans
at an interest rate no higher than the bank's base commercial lending rate.
The Company is required to pay a fee equal to one-eighth of one percent per
annum on the unused commitment. The agreement contains certain restrictive
covenants, specifically a trailing twelve month profitability requirement, a
current asset to current liabilities ratio, a total liabilities to tangible
net worth ratio and certain other covenants, as defined in the agreement.
The agreement was amended on April 4, 2005. The effect of the amendment was
to increase the limit of the Company's combined open market stock repurchases
and dividend payments to $2.5 million per year from $1.0 million per year
without prior waiver. The agreement was scheduled to expire on June 21,
2006. On June 20, 2006, the agreement was amended. The effect of the
amendment was to extend the expiration date of the agreement to August 15,
2008 and remove the eligible accounts receivable limitation on advances under
the facility. The amendment also modified the total liabilities to tangible
net worth ratio covenant. The credit facility has been extended to October
14, 2008. The Company is in compliance with all covenants of the agreement
and there have been no borrowings against the credit line.
Management believes that the Company's cash flows generated from operations
will be sufficient to meet short-term liquidity needs. Management further
believes that its working capital together with internally generated funds
from its operations and its bank line of credit are 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 July 31, 2008 were $7,563,000
compared to revenues of $8,617,000 for the comparable prior year period,
a decrease of approximately 12%. During the last fiscal year, the Company
experienced severe downward pressure on its selling prices. The Company's
selling prices are significantly dependent on the pricing and availability
of DRAM chips. The Company's products utilize DRAMs of varying capacities,
organizations and package types. The change in the purchase cost of
specific DRAMs over time are not necessarily uniform or even move in the
same direction. In fiscal 2008, the Company's purchase cost of the primary
DRAMs used in its products declined by over 60 percent. This resulted in a
larger than anticipated reduction in selling prices as the Company passed
these cost savings through to its customers. Consequently, the Company's
selling prices for similar products when compared on a year over year basis
were lower than expected. During the first quarter of the current fiscal
year, that selling price pressure has lessened.
Revenues for the three-month periods ended July 31, 2008 and 2007 by
geographic region were:
Three months ended Three months ended
July 31, 2008 July 31, 2007
________________ ________________
United States $ 5,574,000 $ 6,389,000
Europe 1,447,000 1,522,000
Other
(principally Asia Pacific Region) 542,000 706,000
________________ ________________
Consolidated $ 7,563,000 $ 8,617,000
================ ================
Cost of sales for the first quarter of fiscal 2009 and 2008 were 65% of
revenues. 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 first quarter of
fiscal 2009 was $4.9 million compared to $5.6 million in the prior year
comparable period.
Engineering expense in fiscal 2009's first quarter totaled $332,000, versus
$301,000 for the same prior year period. Engineering expense excludes
expenses incurred for research and development into new product areas.
Research and development expense in fiscal 2009's first quarter were
$212,000 versus nil in the same prior year period. 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. Of the total research and development expense incurred in the
first quarter of this fiscal year, approximately $121,000 represented a
non-cash expense for 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 economic
benefits from them. We expect to make further investments in this area.
Selling, general and administrative (S,G&A) expense in the first fiscal
quarter ended July 31, 2008 increased by approximately $869,000 from the
comparable prior year period. The current fiscal year's first quarter
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. Current fiscal year S,G&A expense
includes a $70,000 charge to increase the Company's allowance for doubtful
accounts and sales returns reserve as a result of one of the Company's
foreign customers entering receivership. Stock-based compensation expense is
recorded as a component of S,G&A expense and totaled $126,000 and $93,000,
respectively, for the first quarter of fiscal 2009 and 2008.
Other income, net for the first quarter of fiscal 2009 totaled $109,000,
versus $219,000 for the same prior year period. Other income in fiscal
2009's first quarter consisted primarily of $111,000 of net interest income
offset by approximately a $2,000 loss on disposal of assets. Fiscal 2008's
first quarter other income, net consisted of approximately $201,000 of
interest income and $18,000 of foreign currency transactions gains, primarily
as a result of the EURO strengthening relative to the US dollar.
Income tax expense (benefit) for the first quarter of fiscal 2009 was a
benefit of $385,000 compared to $235,000 expense for the same prior year
period. The Company's effective tax rate for financial reporting purposes
in fiscal 2009 is approximately 38.8%. However, the Company has federal net
operating loss (NOL) carry-forwards totaling approximately $1.5 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 the fiscal
2009 and fiscal 2008 first quarter ending July 31 includes approximately
$126,000 and $93,000 of stock option expense, respectively, in operating
expenses related to the fair value of options granted to employees and
directors under the Company's stock-based compensation plans which is being
amortized over the service period in the financial statements, as required by
SFAS 123(R). These awards have been classified as equity instruments, and
as such, a corresponding increase of approximately $126,000 has been
reflected in additional paid-in capital in the accompanying consolidated
balance sheet as of July 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 and commercial
paper, which matures within ninety days. The Company'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 July 31, 2008 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.
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
is approximately $121,000. The transaction was deemed exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,
as a transaction by an issuer not involving any public offering.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
No reportable event.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No reportable event.
Item 5. OTHER INFORMATION.
No reportable event.
Item 6. 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: September 10, 2008 By: /s/ Mark E. Maddocks
_________________________
Mark E. Maddocks
Vice President, Finance
(Principal Financial Officer)