** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB/A**

 

**ý****        ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended:     September 30, 2004**

 

**or**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 130R 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                               to                               **

 

**CommissionFile Number:             0-27252**

 

**AML COMMUNICATIONS, INC.**

(Exact name of small business issuer as specified in its charter)

 
| **Delaware**                                                    | ** ** | **77-0130894**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or Other jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification No.) |
|                                                            |       |                               |
| **1000 Avenida  Acaso**                                    | ** ** | ** **                         |
| **Camarillo, California**                                       | ** ** | **93012**                          |
| (Address of principal executive offices)                        |       | (Zip Code)                         |

 

**(805) 388-1345**

(Issuer’s telephone number including area code)

 

Check whether the issuer (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes ý No o

 

State the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

Common Stock Outstandingas of September 30, 2004: 9,975,866  shares

 

Transitional SmallBusiness Disclosure Format: Yes oNo ý

 

 

----

 

EXPLANATORY NOTE

 

This quarterly report on Form 10-QSB/A is an amendment to the Form 10-QSB filed by the Registrant on November 15, 2004.

 

This quarterly report on Form 10-QSB/A is being filed to reflect the restatement of the Registrant’s Financial Statements (the “Restatement”). The restatement reflects the following:

 

•                  Additional disclosure of RevenueRecognition policies in accordance with SAB 101, asamended by SAB 104

•                  Reclassification of related notespayable from long term liabilities to current liabilities

•                  Additional disclosure relating to theacquisition of MPI, its cost structure, and the keyfactors for the acquisition

•                  Additional disclosure on theintangible assets in connection with the MPIacquisition

 

THIS REPORT DOES NOT OTHERWISE ATTEMPT TO UPDATE THE INFORMATION PROVIDED HEREIN BEYOND THE ORIGINAL FILING DATE.

 

2

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**AML COMMUNICATIONS, INC.**

 

**INDEX TO FORM 10QSB**

 
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                                                                                                             |       |
|------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|             |                                                                                                                                                                                                   |       |
| Item 1.          | Financial Statements                                                                                                                                                                                   |       |
|             |                                                                                                                                                                                                   |       |
|             | Balance Sheet at  Sept 30, 2004 (As restated)                                                                                                                                                          |       |
|             |                                                                                                                                                                                                   |       |
|             | Statements of  Operations for the three month periods ended September 30, 2004 and September 30,  2003 and the six month periods ended September 30, 2004 and September 30,  2003. |       |
|             |                                                                                                                                                                                                   |       |
|             | Statements of  Cash Flows for the six month periods ended September 30, 2004 and September 30,  2003                                                                                         |       |
|             |                                                                                                                                                                                                   |       |
|             | Notes  to Financial Statements                                                                                                                                                                         |       |
|             |                                                                                                                                                                                                   |       |
| Item 2.          | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                                                                            |       |
|             |                                                                                                                                                                                                   |       |
| Item 3.          | Controls and Procedures                                                                                                                                                                                |       |
|             |                                                                                                                                                                                                   |       |
| **PART II** | **OTHER INFORMATION**                                                                                                                                                                                  | ** ** |
| ** **       | ** **                                                                                                                                                                                             | ** ** |
| Item 1.          | Legal Proceedings                                                                                                                                                                                      |       |
|             |                                                                                                                                                                                                   |       |
| Item  2.         | Unregistered  Sales of Equity and Use of Proceeds                                                                                                                                                      |       |
|             |                                                                                                                                                                                                   |       |
| Item 3.          | Defaults Upon  Senior Securities                                                                                                                                                                       |       |
|             |                                                                                                                                                                                                   |       |
| Item  4.         | Submission  of Matters to a Vote of Security Holders                                                                                                                                                   |       |
|             |                                                                                                                                                                                                   |       |
| Item 5.          | Other Information                                                                                                                                                                                      |       |
|             |                                                                                                                                                                                                   |       |
| Item 6.          | Exhibits                                                                                                                                                                                               |       |
|             |                                                                                                                                                                                                   |       |
|             | SIGNATURES                                                                                                                                                                                             |       |

 

3

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**PART I - FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED CONDENSED BALANCESHEET**

**(unaudited)**

**(As restated – see note 1)**

 
| ** **                                                                                                             | ** ** | **For  September 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                             | ** ** | ** **                        | ** ** |
| **ASSETS**                                                                                                             | ** ** | ** **                        | ** ** |
| Current Assets:                                                                                                        |       |                              |       |
| Cash and cash equivalents                                                                                              |       | $                                 | 1,820,000  |   |
| Accounts receivable, net of allowance for doubtful  accounts of $43,000 at September 30, 2004                     |       | 860,000                           |       |
| Inventories, net of inventory reserve of $466,000 at  September 30, 2004                                          |       | 1,595,000                         |       |
| Other current assets                                                                                                   |       | 109,000                           |       |
| Total current assets                                                                                                   |       | 4,384,000                         |       |
|                                                                                                                   |       |                              |       |
| Property and Equipment, at cost                                                                                        |       | 4,148,000                         |       |
| Less: Accumulated depreciation and amortization                                                                        |       | (3,481,000                        | )          |
| Property and Equipment, net                                                                                            |       | 667,000                           |       |
| Intangible Assets:                                                                                                     |       |                              |       |
| Technologies, net                                                                                                      |       | 930,000                           |       |
| Patents                                                                                                                |       | 181,000                           |       |
| Customer lists, net                                                                                                    |       | 301,000                           |       |
| Trademarks                                                                                                             |       | 181,000                           |       |
| Other Assets                                                                                                           |       | 35,000                            |       |
| Total Assets                                                                                                           |       | $                                 | 6,679,000  |   |
|                                                                                                                   |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                          |       |                              |       |
|                                                                                                                   |       |                              |       |
| Current Liabilities:                                                                                                   |       |                              |       |
| Accounts payable                                                                                                       |       | $                                 | 187,000    |   |
| Line of Credit                                                                                                         |       | 100,000                           |       |
| Current portion of capital lease obligations                                                                           |       | 84,000                            |       |
| Current Portion of Notes Payable – officers                                                                       |       | 50,000                            |       |
| Accrued expenses:                                                                                                      |       |                              |       |
| Accrued payroll and payroll related expenses                                                                           |       | 192,000                           |       |
| Accrued income taxes                                                                                                   |       | 292,000                           |       |
| Other accrued liabilities                                                                                              |       | 134,000                           |       |
| Total current liabilities                                                                                              |       | 989,000                           |       |
|                                                                                                                   |       |                              |       |
| Notes payable – officers, net of current portion                                                                  |       | 234,000                           |       |
| Notes payable – investors, net                                                                                    |       | 41,000                            |       |
| Deferred Taxes                                                                                                         |       | 11,000                            |       |
| Capital Lease Obligations, net of current portion                                                                      |       | 24,000                            |       |
| Total liabilities                                                                                                      |       | 1,349,000                         |       |
| Stockholders’ Equity:                                                                                             |       |                              |       |
| Common stock, $0.01 par value:15,000,000  shares authorized; 9,975,866 shares issued and outstanding at Sept 30, 2004. |       | 100,000                           |       |
|                                                                                                                   |       |                              |       |
| Capital in excess of par value                                                                                         |       | 13,369,000                        |       |
| Accumulated deficit                                                                                                    |       | (8,139,000                        | )          |
| Total stockholders’ equity                                                                                        |       | 5,330,000                         |       |
|                                                                                                                   |       | $                                 | 6,679,000  |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Month Periods Ended** | ** ** | **Six Month Periods Ended** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **September 30,**        | ** ** | **September 30,**      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                             | ** ** | **2004**                      | ** ** | **2003**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Net sales                                                              |       | $                             | 1,882,000  |                        | $          | 1,729,000 |   | $ | 4,057,000 |   | $ | 3,277,000 |   |
| Cost of goods sold                                                     |       | 1,097,000                     |       | 805,000                     |       | 2,337,000 |   | 1,636,000 |   |
| Gross profit                                                           |       | 785,000                       |       | 924,000                     |       | 1,720,000 |   | 1,641,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Operating expenses:                                                    |       |                          |       |                        |       |   |   |   |   |
| Selling, general & administrative                             |       | 537,000                       |       | 379,000                     |       | 947,000 |   | 644,000 |   |
| Research and development                                               |       | 199,000                       |       | 174,000                     |       | 382,000 |   | 373,000 |   |
| SAE                                                                    |       | 736,000                       |       | 553,000                     |       | 1,329,000 |   | 1,017,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Profit (loss) from operations                                          |       | 49,000                        |       | 371,000                     |       | 391,000 |   | 624,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Other (expense) income, net                                            |       | (31,000                       | )          | 14,000                      |       | (48,000 | ) | (16,000 | ) |
| Profit (loss) before provision for income taxes                        |       | 18,000                        |       | 385,000                     |       | 343,000 |   | 608,000 |   |
| Provision for income taxes                                             |       | —                        |       | 54,000                      |       | — |   | 54,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Net profit                                                             |       | $                             | 18,000     |                        | $          | 331,000 |   | $ | 343,000 |   | $ | 554,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Basic earnings (loss) per common share                                 |       | $                             | 0.00       |                        | $          | 0.04 |   | $ | 0.04 |   | $ | 0.07 |   |
| Basic weighted average number of shares of common  stock outstanding   |       | 9,976,000                     |       | 7,832,000                   |       | 9,064,000 |   | 7,831,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Diluted earnings (loss) per common share                               |       | $                             | 0.00       |                        | $          | 0.03 |   | $ | 0.03 |   | $ | 0.06 |   |
| Diluted weighted average number of shares of common  stock outstanding |       | 11,840,000                    |       | 9,616,000                   |       | 10,928,000 |   | 9,615,000 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

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**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Six Month Periods Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
| Cash Flows from Operating Activities:                                              |       |                         |       |   |   |
| Net Profit                                                                         |       | $                            | 343,000    |   | $ | 554,000 |   |
| Adjustments to reconcile net profit to net cash  provided by operating activities: |       |                         |       |   |   |
| Debt discount fees                                                                 |       | 9,000                        |       | 4,000 |   |
| Depreciation and amortization                                                      |       | 119,000                      |       | 150,000 |   |
|                                                                               |       |                         |       |   |   |
| Bad debt expense                                                                   |       | 9,000                        |       | (1,000 | ) |
| Loss (Gain) on sale of fixed assets                                                |       | 30,000                       |       | (48,000 | ) |
| Changes in assets and liabilities:                                                 |       |                         |       |   |   |
| Decrease (increase) in:                                                            |       |                         |       |   |   |
| Accounts receivable                                                                |       | (80,000                      | )          | (522,000 | ) |
| Inventories                                                                        |       | (118,000                     | )          | 45,000 |   |
| Inventory Reserves                                                                 |       | 132,000                      |       | — |   |
| Other current assets                                                               |       | 35,000                       |       | 28,000 |   |
| Other assets                                                                       |       | 76,000                       |       | — |   |
| Increase (decrease) in:                                                            |       |                         |       |   |   |
| Accounts payable                                                                   |       | (375,000                     | )          | (60,000 | ) |
| Accrued state income taxes                                                         |       | —                       |       | 54,000 |   |
| Accrued expenses                                                                   |       | (59,000                      | )          | (189,000 | ) |
| Net cash provided by operating activities                                          |       | $                            | 121,000    |   | $ | 15,000 |   |
|                                                                               |       |                         |       |   |   |
| Cash Flows from Investing Activities:                                              |       |                         |       |   |   |
| Purchases of property and equipment                                                |       | (345,000                     | )          | (9,000 | ) |
| Proceeds from the sale of property and equipment                                   |       | —                       |       | 48,000 |   |
| Cash received in the MPI  acquisition                                              |       | 1,150,000                    |       | — |   |
| Net cash provided by investing activities                                          |       | $                            | 805,000    |   | $ | 39,000 |   |
|                                                                               |       |                         |       |   |   |
| Cash Flows from Financing Activities:                                              |       |                         |       |   |   |
| Proceeds from exercise of stock options                                            |       | —                       |       | 1,000 |   |
| Proceeds from line of credit, net                                                  |       | 20,000                       |       | 117,000 |   |
| Proceeds from notes payable - related parties                                      |       | (14,000                      | )          | 245,000 |   |
| Proceeds from notes payable – investors                                       |       | (8,000                       | )          | 43,000 |   |
| Principal payments on capital lease obligations, net                               |       | (81,000                      | )          | (26,000 | ) |
| Net cash (used in) provided by financing activities                                |       | $                            | (83,000    | ) | 380,000 |   |
|                                                                               |       |                         |       |   |   |
| Net increase (decrease) in Cash and Cash Equivalents                               |       | 843,000                      |       | (434,000 | ) |
|                                                                               |       |                         |       |   |   |
| Cash and Cash Equivalents, beginning of period                                     |       | 977,000                      |       | 195,000 |   |
| Cash and Cash Equivalents, end of period                                           |       | $                            | 1,820,000  |   | $ | 629,000 |   |
| Supplemental disclosures of cash flow information:                                 |       |                         |       |   |   |
| Cash paid during the period for:                                                   |       |                         |       |   |   |
| Interest                                                                           |       | $                            | 57,000     |   | $ | 64,000 |   |
| Income Taxes                                                                       |       | 1,000                        |       | 1,000 |   |
| Non cash investing and financing activities:                                       |       |                         |       |   |   |
| Unamortized debt discount fees                                                     |       | $                            | 13,000     |   | $ | 31,000 |   |
| Debt incurred to purchase property and equipment                                   |       | —                       |       | $ | 50,000 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

6

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**AML COMMUNICATIONS, INC.**

**NOTES TO****UNAUDITED****CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2004**

** **

**1.****                                      Basisof Presentation (As restated)**

 

*Line ofBusiness*

 

AMLCommunications, Inc. (the “Company”) is a designer, manufacturer, andmarketer of amplifiers and related products that address the defense microwaveand wireless communications markets. The Company currently conducts itsoperations through two reportable segments: (1) amplifiers and relatedproducts that are designed, manufactured, and marketed by the Company, and (2) highpower microwave amplifiers that are designed, manufactured, and marketedthrough its wholly owned division, Microwave Power, Inc.

 

Theaccompanying unaudited financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States.  However, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been omitted or condensed pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationhave been included.  The results ofoperations and cash flows for the six month period presented are notnecessarily indicative of the results of operations for a full year.  These financial statements should be read inconjunction with the Company’s March 31, 2004 audited financial statementsand notes thereto included in the Company’s Annual Report on Form 10-KSB

 

*Restatement*

 

Subsequent to the issuance of our financial statements for the quarter ended September 30, 2004, our management determined that the current portion of a related notes payable should be reclassified from long term liabilities to current liabilities.

 

As a result, thefinancial statements for the period ended September 30, 2004 have beenrestated.  The significant effect ofthese restatements is as follows:

 

•                  Reclassification of related notespayable from long term liabilities to current liabilities

 
| ** **                                           | ** ** | **As previously  Reported** | ** ** | **Restatement  Adjustment** | ** ** | **As  Restated** | ** ** | **Reference** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------|------------|---------------|------------|
|                                                 |       |                        |       |                        |       |             |       |          |       |
| Balance sheet at September 30, 2004:            |       |                        |       |                        |       |             |       |          |       |
| Current portion of notes payable – officers     |       | —                      |       | (50,000                     | )          | (50,000          | )          | (1)           |       |
| Note payable – officers, net of current portion |       | (276,000                    | )          | 50,000                      |       | (226,000         | )          | (1)           |       |

 

----

(1) The current portion of a related party note payable was reclassed to current liabilities.

 

**Principlesof consolidation**

 

The accompanyingconsolidated financial statements include the accounts of AML Communications,Inc, and its wholly owned division, Microwave Power, Inc. from theacquisition date, on June 18, 2004. All significant inter-company accountsand transactions have been eliminated in consolidation.  The six month period ended September 30,2004 includes 104 days of Microwave Power, Inc.’s results of operationsprospectively from the date of the acquisition, or June 19, 2004 through September 30,2004.

 

7

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**2.****                                                EarningsPer Share**

 

**Statementof Financial Accounting Standards No. 128, “Earnings per share” requiresthe presentation of basic earnings per share and diluted earnings pershare.  Basic and diluted earnings pershare computations are presented by the Company conform to the standard and arebased on the weighted average number of shares of Common Stock outstandingduring the year.**

** **

Basicearnings per share is computed by dividing net income or loss by theweighted average number of shares outstanding for the year.  “Diluted” earnings per share is computed bydividing net income or loss by the total of the weighted average number ofshares outstanding, and the dilutive effect of outstanding stock options(applying the treasury stock method).

 

**TheCompany had 1,864,000 of granted stock options and warrants that wereexercisable as of September 30, 2004 and 1,784,000 of granted stockoptions and warrants exercisable at September 30, 2003.**

** **

**Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted earnings per share computations:**

** **
| **Six months ended September 30,  2004** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                    |       |           |       |       |       |          |       |
| Net income available to common stockholders   |       | $              | 343,000    |       | 9,064,000  |          | $          | 0.04 |   |
| Effect of dilutive securities:                |       |           |       |       |       |          |       |
| Stock options                                 |       |           |       | 1,624,000  |       |          |       |
| Warrants                                      |       |           |       | 240,000    |       |          |       |
| Diluted earnings per share:                   |       | $              | 343,000    |       | 10,928,000 |          | $          | 0.03 |   |

 
| **Six months ended September 30,  2003** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                    |       |           |       |       |       |          |       |
| Net income available to common stockholders   |       | $              | 554,000    |       | 7,831,000  |          | $          | 0.07 |   |
| Effect of dilutive securities:                |       |           |       |       |       |          |       |
| Stock options                                 |       |           |       | 1,469,000  |       |          |       |
| Warrants                                      |       |           |       | 315,000    |       |          |       |
| Diluted earnings per share:                   |       | $              | 554,000    |       | 9,615,000  |          | $          | 0.06 |   |

 

**3.**                                                **Inventories**

 

Inventoriesinclude costs of material, labor, and manufacturing overhead and are stated atthe lower of cost (first-in, first-out) or market and consist of the following:

 
| ** **      | ** ** | **September 30, 2004** | ** ** |
|-----------------|------------|-----------------------------|------------|
|            |       |                        |       |
| Raw materials   |       | $                           | 978,000    |   |
| Work-in-process |       | 398,000                     |       |
| Finished goods  |       | 219,000                     |       |
|            |       | $                           | 1,595,000  |   |

 

8

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**4.****                                                IntangibleAssets**

 

The Company accounts for its intangible assets under the applicable guidelines of SFAS 142 “goodwill and other intangible assets” and SFAS 144 “accounting for the impairment or disposal of long lived assets”. Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired. The Company evaluates if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished. Under SFAS 144, when deemed necessary, the Company completes the evaluation of the recoverability of its long-lived assets by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values.  Under SFAS 142 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.  During the three months ended September 30 2004, the Company recognized no impairment.

 

At September 30, 2004, intangibles consist of the following:

 
| ** **               | ** ** | **September 30, 2004** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| **Intangibles**          | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|                     |       |                        |       |   |   |   |   |
| Amortized intangibles:   |       |                        |       |   |   |   |   |
| Patents                  |       | $                           | 189,000    |   | $ | (8,000 | ) | $ | 181,000 |   |
| Existing Technology      |       | 961,000                     |       | (31,000 | ) | 930,000 |   |
| Customer List            |       | 339,000                     |       | (38,000 | ) | 301,000 |   |
|                     |       |                        |       |   |   |   |   |
| Unamortized intangibles: |       |                        |       |   |   |   |   |
| Trademarks               |       | 181,000                     |       | — |   | 181,000 |   |
|                     |       | $                           | 1,670,000  |   | $ | (77,000 | ) | $ | 1,593,000 |   |

 

TheCompany assigned an 8 year life to patents, a 12 year life to ExistingTechnology, and a 3 year life to Customer Lists. All are subject toamortization.  Trademarks were assignedas having an indefinite life.

 

Amortization expense from continuing operation for quarter ended September 30, 2004 was $77,000.  The Company expects the amortization expenses for the next five years to be as follows:

 
| **Year Ending March 31:** | ** ** | **Annual Amount** | ** ** |
|--------------------------------|------------|-------------------|------------|
| 2005                           |       | $                 | 180,026    |   |
| 2006                           |       | $                 | 216,305    |   |
| 2007                           |       | $                 | 216,305    |   |
| 2008                           |       | $                 | 122,200    |   |
| 2009                           |       | $                 | 103,379    |   |

 

**5**.                                                **Accounts Receivable Financing**

 

In September 2003,the Company modified its agreement with Silicon Valley Bank. Under themodification agreement, the aggregate amount of all receivables purchased bythe bank could not exceed $2,000,000. The Company was obligated to pay the banka monthly finance charge which was computed as the greater of $6,500 or 1%above the prime rate, per annum, on the average daily account balanceoutstanding for each month. The Company was also required to pay the bank amonthly collateral handling fee of 0.75% per month on the average daily accountbalance outstanding for the month. The bank refunded any amount remaining frompaid accounts after deducting the 80% advance, the monthly finance charge, thecollateral handling fee and any other adjustments made

 

9

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or fees due pursuant tothe Account Receivable Purchase Agreement. The bank required the Company torepurchase receivables it had purchased if they remained unpaid after 90 daysfrom the invoice date, if the account debtor filed (or has filed against it)bankruptcy or other insolvency proceedings, if the Company breached theAccounts Receivable Purchase Agreement or if the account debtor asserted anyclaim relating to the receivable.  As of June 30,2004, there was $184,000 of refundable reserves due to the Company under theborrowing agreement.  On July 6,2004, the Company terminated its agreement with Silicon Valley Bank and enteredinto a new financing agreement with Bridge Bank.

 

Under the asset-basedfinancing agreement with Bridge Bank, the Company is required to pay the bank$7,500 upon execution of the contract and on each anniversary thereafter priorto termination of the agreement. The credit limit under this agreement is$1,500,000, of which $1,000,000 may be used for cash advances against accountsreceivables and $500,000 may be used for equipment advances. The Company isobligated to pay the bank a finance charge at a rate per year equal to theprime rate, which in no event shall be less than 4.0%, plus 2.0% with respectto cash advances and a rate of such prime rate plus 3.5% with respect toequipment advances. The Company is required to maintain certain financialrequirements including net profit after tax, on a quarterly basis, of at least$0.01 and maintain a debt service coverage ratio of at least 1.25 to 1.00, withrespect to equipment advances.  Thisagreement terminates on July 7, 2005, or upon a date that the bank choosesto terminate the agreement.  Any unpaidbalance is due and payable pursuant to the agreement on the terminationdate.  If the agreement is terminatedwithin the first 12 months, the Company generally is required to pay a $15,000fee to the bank.

 

**6.**                                                EquityTransactions

 

During the six months ended September 30, 2004, the Board of Directors granted stock options of 119,500 shares as employee compensation.  The options prices range from $1.40 to $1.55 per share.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends SFAS 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 148 amends the disclosure requirements of Statement 123 to require prominent disclosures 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 following table presents pro forma disclosures required by SFAS No. 148 of net income (loss) and basic and diluted earnings (loss) per share as if stock-based employee compensation had been recognized during the six months ended September 30, 2004. The compensation expense for these periods has been determined under the fair value method using the Black-Scholes pricing model, and assumes graded vesting.

 
| ** **                                                                                        | ** ** | **For the  six months ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                        | ** ** | **September 30, 2004**   | ** ** | **September 30,  2003** | ** ** |
|                                                                                              |       |                          |       |   |   |
| Net income (loss) as reported                                                                     |       | $                             | 343,000    |   | $ | 554,000 |   |
| Less: stock-based compensation  expense, net of related tax effects ok                            |       | (26,000                       | )          | (15,000 | ) |
| Total stock-based employee compensation expense  determined under fair-value-based method for all |       |                          |       |   |   |
| Pro forma net loss                                                                                |       | $                             | 317,000    |   | $ | 539,000 |   |
|                                                                                              |       |                          |       |   |   |
| Basic earnings per share - as  reported                                                           |       | 0.04                          |       | 0.07 |   |
| Diluted earnings per share -  as reported                                                         |       | 0.03                          |       | 0.06 |   |
| Basic earnings per share - pro  forma                                                             |       | 0.03                          |       | 0.06 |   |
| Diluted earnings per share -  pro forma                                                           |       | 0.03                          |       | 0.05 |   |

 

10

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The assumptions used incalculating the fair value of options granted using the Black-Scholes option- pricing model are as follows:

 
| Expected life (years)   |   | 4.90 |   | 4.33 |   |
|-------------------------|--------|------|--------|------|--------|
| Risk-free interest rate |   | 3.10 | %      | 3.30 | %      |
| Dividend yield          |   | 0    | % and  | 0    | %      |
| Volatility              |   | 160  | % and  | 141  | %      |

 

**7.****                                                RelatedParty**

 

Duringthe quarter ended September 30, 2004, the Company paid $13,000 to theprevious stockholders of MPI in connection with theproperty rent for the premises located in Santa Clara.

 

**8.****                                               ListingHistory**

 

The Company’s commonstock currently trades on Nasdaq’s OTC Bulletin Boardunder the symbol “AMLJ.OB”. Its common stock tradedon the Nasdaq Small Cap Market from October 8,2001 to August 13, 2002 and on the NasdaqNational Market prior to that time.  TheCompany was de-listed from NASDAQ because of its failure to meet the $1.00minimum bid price requirement.

 

**9.****                                               Acquisitions**

 

On May 25,2004, the Company signed a definitive agreement for the acquisition ofMicrowave Power, Inc. (“MPI”), which wascompleted on June 18, 2004. MPI was merged intothe Company’s wholly owned subsidiary, with the subsidiary as the survivingentity. The total consideration for the acquisition was $3,028,000. Pursuant tothe acquisition agreement, 2,117,108 shares as consideration for theacquisition and 21,174 shares to be issued to the broker were committed, orauthorized for issuance by our board of directors, as of June 18, 2004.The difference between the amount of “net assets acquired” and the purchaseprice consists of approximately $145,000 in transactional costs andapproximately $30,000 (21,174 shares at $1.43 per share) worth of shares of thecommon stock issued to the broker. Transactional costs include legal, accounting, and appraisal fees. Therewas no change in MPI’s management and the Companyentered into employment agreements with two of MPI’ssenior officers, its past President and Secretary. MPIwill continue to operate as the Company’s division from its facility in SantaClara, which is owned by MPI’s prior shareholders andleased to the Company.

 

TheMicrowave Power, Inc. (MPI) acquisition wasdriven by a number of key factors, including:

 

1)              Technologically,MPI’s semi-monolithic, gold filled via’s, air bridge and microwave-monolithic-ceramic (MMCC) technology provide access to processes that theCompany believes are complimentary and additive to those available to AML priorto the acquisition.

2)              MPI’s product base addresses higher power and higherfrequency sectors of the microwave market. This acquisition is intended to strengthen the Company’s productofferings to this market by adding higher power microwave amplifiers.

 

11

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Asummary of the unaudited condensed balance sheet of MPI as of June 18, 2004 is as follows:

 
| ** **                  | ** ** | **June 18, 2004** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **(Unaudited)**        | ** ** |
|                        |       |                   |       |
| Cash                        |       | $                      | 1,150,000  |   |
| Receivables                 |       | 124,000                |       |
| Inventory                   |       | 494,000                |       |
| Property and equipment, net |       | 61,000                 |       |
| Intangible assets           |       | 1,670,000              |       |
| Total assets acquired       |       | $                      | 3,499,000  |   |
| Current liabilities         |       | (295,000               | )          |
| Net assets acquired         |       | $                      | 3,204,000  |   |

 

Thepurchased intangible assets will be amortized over their useful lives, whichrange from three to twelve years.  Of the$1,670,000 of acquired intangible assets, $189,000 was assigned to patents (8year useful life), $961,000 was assigned to Existing Technology (12 year usefullife), and $339,000 was assigned to Customer Lists (3 year useful life). The balance of $181,000 was assigned to trademarks, having an indefinite life,and will be tested annually or on an interim basis for impairment.  We found no indication of impairment for theperiod ended September 30, 2004.

 

**10.****                                         Segments**

 

The Company has two reportable segments consisting of (1) AML Communications, Inc. and (2) the Microwave Power, Inc.  AML Communications is a designer, manufacturer, and marketer of amplifiers and related products that address the defense microwave and wireless communications markets. These products are manufactured and sold through operations in Camarillo, California. Microwave Power, Inc. is a designer, manufacturer and marketer of high power microwave amplifiers. These products are manufactured and sold through operations in Santa Clara, California. The Company evaluates performance based on sales, gross profit margins and operating profit before income taxes.

 

The following is information for the Company’s reportable segments for the three and six months periods ended September 30, 2004:

 

**For the three months ended September 30, 2004**

 
| **(in thousands)**                                           | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                         |       |    |       |    |       |            |       |      |       |
| Revenue                                                      |       | $       | 1,575      |    | $          | 307             |       | —    |       | $ | 1,882 |   |
|                                                         |       |    |       |    |       |            |       |      |       |
| Gross Profit                                                 |       | 597     |       | 188     |       | —          |       | 785       |       |
| Depreciation & amortization (Includes  intangibles) |       | 46      |       | 61      |       | —          |       | 107       |       |
|                                                         |       |    |       |    |       |            |       |      |       |
| Interest expense                                             |       | 35      |       | —  |       | —          |       | 35        |       |
|                                                         |       |    |       |    |       |            |       |      |       |
| Other, net                                                   |       | 577     |       | 48      |       | —          |       | 625       |       |
| (Loss) Profit from continuing Operations before tax          |       | $       | (61        | )       | $          | 79              |       | —    |       | $ | 18 |   |
|                                                         |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                          |       | 3,112   |       | 3,567   |       | —          |       | 6,679     |       |
|                                                         |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                         |       | 265     |       | 1       |       | —          |       | 266       |       |

 

12

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**For the six months ended September 30, 2004**

 
| **(in thousands)**                                           | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                         |       |    |       |    |       |            |       |      |       |
| Revenue                                                      |       | $       | 3,673      |    | $          | 384             |       | —    |       | $ | 4,056 |   |
|                                                         |       |    |       |    |       |            |       |      |       |
| Gross Profit                                                 |       | 1,475   |       | 244     |       | —          |       | 1,719     |       |
| Depreciation & amortization (Includes  intangibles) |       | 111     |       | 81      |       | —          |       | 192       |       |
|                                                         |       |    |       |    |       |            |       |      |       |
| Interest expense                                             |       | 57      |       | —  |       | —          |       | 57        |       |
|                                                         |       |    |       |    |       |            |       |      |       |
| Other, net                                                   |       | 1,066   |       | 61      |       | —          |       | 1,127     |       |
| Profit from continuing Operations before tax                 |       | $       | 241        |    | $          | 102             |       | —    |       | $ | 343 |   |
|                                                         |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                          |       | 3,112   |       | 3,567   |       | —          |       | 6,679     |       |
|                                                         |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                         |       | 344     |       | 1       |       | —          |       | 345       |       |

 

TheCompany had one reportable segment for the three and six month periods ended September 30,2003.

 

**11.****                                        Majorcustomers and vendors**

 

Threecustomers provided 40%, and two customers provided 33%, of net revenue for thesix months ended September 30, 2004 and 2003, respectively. Total accountsreceivable due from these customers was approximately $204,000 and 378,000 asof September 30, 2004 and 2003 respectively.

 

TheCompany extends credit to its customers based upon its assessment of theircredit worthiness and generally does not require collateral. Credit losses havenot been significant.

 

Twovendors accounted for 20% and 26% of the Company’s net purchases for the sixmonths ended September 30, 2004 and 2003, respectively. Total accountspayable due to these vendors was $0 and $40,000 as of September 30, 2004and 2003, respectively.

 

**12.****                                        Reclassifications**

 

Certain comparativeamounts have been reclassified to conform with the current year’s presentation.

 

**Item 2**.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

** **

This filing containsforward-looking statements, which involve risks and uncertainties.  Our actual future results may differmaterially from the results discussed in the forward-looking statements.  When used in this report, the words “expects”“anticipates” and “estimates” and similar expressions are intended to identifyforward-looking statements. Factors that could cause actual results to differ materiallyfrom those expressed in any forward-looking statement made by us include, butare not limited to:

 

•                  our ability to finance our activitiesand maintain our financial liquidity;

•                  our ability to attract and retainqualified, knowledgeable employees;

•                  the impact of general economicconditions on our business;

•                  postponements, reductions, orcancellations in orders from new or existing customers;

•                  the limited number of potentialcustomers for our products;

•                  the variability in gross margins onour products;

•                  our ability to design  and market new products successfully;

•                  our failure to acquire new customersin the future;

•                  deterioration of business andeconomic conditions in our markets;

•                  intensely competitive industryconditions with increasing price competition; and

•                  the rate of growth in the defensemarkets.

 

13

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** Overview**

 

We arebased in southern California and design, manufacture, and market RadioFrequency (“RF”) and Microwave low noise and poweramplifiers for a variety of frequency ranges and transmission protocols servingthe defense microwave and wireless communications markets. Our defense industryproducts, which represents approximately 90% of oursales, are used in radar and electronic warfare equipment integrated intoelectronic systems for tactical aircraft, ships, ground systems, and missilesystems. Our wireless products consist of an array of low noise and poweramplifiers serving the wireless, PCS, and two-way messaging market, as well asCellular Coverage Enhancement amplifiers. These products, representing approximately 10% of our sales, are sold tocellular operators and to original equipment manufactures. The demand for products manufactured by us and used in the defense industry hasbeen growing at a fast pace during the last 2 years and is expected to continueto grow. This growth is attributable to an increase in demand for our productsby government prime contractors, as well as to our strategy to acquire marketshare by offering leading edge products. The demand for wireless products has seen a recent increase due to thecompetition among cellular operators and original equipment manufactures toprovide improved products and services. Our recent acquisition of MPI was part of a strategic move to complement the existingAML product line and expand our technology base. Our business is currentlycomprised of two reportable segments: amplifiers and related productsmanufactured and marketed through our operations in Camarillo, California, andhigh power microwave amplifiers manufactured and marketed through ouroperations in Santa Clara, California.

 

**Resultsof Operations**

 

**ThreeMonths Ended September 30, 2004 Compared to Three Months Ended September 30,2003**

** **

*Net sales. *Net sales for the threemonths ended September 30, 2004 were $1.9 million, as compared to netsales of $1.7 million for the three months ended September 30, 2003, anincrease of 8.1%.  The increase in netsales is attributed to the higher volume of shipments in the defense relatedMIC products.  MIC sales accounted for$1.9 million, or 99.7% of net sales for the three months ended September 30,2004, as compared to $1.6 million, or 93.8% of net sales for the three monthsended September 30, 2003. Additionally, the PCS and wireless messagingmarket, produced $6,000 or 0.3% of net sales for the three months ended September 30,2004, as compared to $107,000, or 6.2% of net sales for the three months ended September 30,2003.

 

*Gross profit. *Gross profit for the threemonths ended September 30, 2004 was $785,000 or 41.7% of net sales,compared to a gross profit of $924,000, or 53.4% of net sales for the threemonths ended September 30, 2003. Gross profit decreased, as a percentage of net sales, as a result oflower margins due to the Company’s aggressive pricing structure in efforts toobtain a larger market share.

 

*Selling, general andadministrative costs. *Selling,general, and administrative costs were $537,000, or 28.5% of net sales, for thethree months ended September 30, 2004, as compared to $379,000, or 21.9%of net sales, for the three months ended September 30, 2003.  The increase is mainly attributed toadministrative cost in connection with maintaining our Santa Clara facility,which we recently acquired.  We alsoreinstated board member fees, which, in previous years, had been waived due tolimited cash flows.  Additionally, weincurred an early termination fee upon canceling our Receivables FinancingAgreement with Silicon Valley Bank.

 

*Research and developmentcosts. *Research anddevelopment costs were $199,000, or 10.5% of net sales, for the three monthsended September 30, 2004, as compared to $174,000 or 10.0% of net sales,for the three months ended September 30, 2003. The increase is attributedto the growing engineering staff as we move towards expanding our developmentcapabilities.

 

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*Other expense, net. *Other expense was $31,000for the three months ended September 30, 2004, as compared to other incomeof $14,000, for the three months ended September 30, 2003.  The company incurred a $5,000 loss on thesale of fixed assets, plus interest expense of $27,000 for the three monthsended September 30, 2004, as compared to the $48,000 gain on the sale offixed assets offset by $34,000 in interest expense for the three months ended September 30,2003.

 

*Provision for income taxes.*For the three months ended September 30, 2004, we recorded no provisionfor state income taxes, due to the California Franchise Tax Board reversing itssuspension of the utilization of loss carry forwards.

 

*Net Income. *For the reasons set forthabove, we generated a net income of $18,000 for the three months ended September 30,2004, as compare to a net income of $331,000 for the three months ended September 30,2003.

 

**SixMonths Ended September 30, 2004 Compared to Six Months Ended September 30,2003**

** **

*Net sales. *Net sales were $4.1 millionfor the six months ended September 30, 2004, as compared to net sales of$3.3 million for the six months ended September 30, 2003, an increase of19.2%. The increase in net sales is largely attributed to the higher volume ofshipments in the defense related MIC products. MIC sales accounted for $3.6 million, or 89.2% of net sales for the sixmonths ended September 30, 2004, as compared to $3.2 million, or 96.1% ofnet sales for the six months ended September 30, 2003. The PCS andwireless messaging market produced $437,000, or 10.8% of net sales for the six months ended September 30,2004, as compared to $129,000, or 3.9% of net sales for the six months ended September 30,2003.

 

*Gross profit. *Gross profit was $1.7million, or 42.3% of net sales, for the six months ended September 30,2004, as compared to $1.6 million, or 50.1% of net sales, for the six monthsended September 30, 2003. Gross profit decreased, as a percentage of netsales, as a result of lower margins due to the Company’s aggressive pricingstructure in efforts to obtain a larger market share.

 

*Selling, general, andadministrative costs. *Selling,general and administrative costs were $947,000, or 23.3% of net sales, for thesix months ended September 30, 2004, as compared to $644,000, or 19.7% ofnet sales, for the six months ended September 30, 2003. The increase ismainly attributed to administrative cost in connection with maintaining ourSanta Clara facility, which we recently acquired.  We also reinstated board member fees, which,in previous years, had been waived due to limited cash flows. Additionally, weincurred an early termination fee upon canceling our Receivables FinancingAgreement with Silicon Valley Bank.

 

*Research and developmentcosts. *Research anddevelopment costs were $382,000, or 9.4% of net sales, for the six months endedSeptember 30, 2004, as compared to $373,000, or 11.4% of net sales, forthe six months ended September 30, 2003. The increase is attributed to the growing engineering staff as we movetowards expanding our development capabilities.

 

*Other expense. *Other expense was $57,000for the six months ended September 30, 2004, as compared to other expenseof $42,000 for the six months ended September 30, 2003. The companyincurred a $5,000 loss on the sale of fixed assets offset by a $5,000 gain onthe sale of other fixed assets, plus interest expense of $57,000 for the sixmonths ended September 30, 2004, as compared to the $64,000 interestexpense offset by a $48,000 gain on the sale of fixed assets for the six monthsended September 30, 2003.

 

*Provision for income taxes. *For the six months ended September 30,2004, we recorded no provision for state income taxes, due to the CaliforniaFranchise Tax Board reversing its suspension of the utilization of loss carryforwards. For the six months ended September 30, 2003, the Companyrecorded a provision of $54,000 due to the California suspension on theutilization of loss carry forwards.

 

*Net Income. *For the reasons set forthabove, we generated a net income of $343,000 for the six months ended September 30,2004, as compare to a net income of $554,000 for the six months ended September 30,2003.

 

15

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**Liquidityand Capital Resources**

 

Historically, we have financed our operations primarilyfrom internally generated funds and, to a lesser extent, loans fromstockholders and capital lease obligations.

 

BetweenJuly 1, 2000 and December 31, 2001, we entered into capital leasesfor the purpose of acquiring production and test equipment valued in aggregateat $740,000.  The terms of the leasesrange from 36 months to 60 months and the interest charges range from 8.6% to15.6%. The total amount remaining on the leases at September 30, 2004 is$86,000.

 

In December 2001,we received a loan of $50,000 from Dr. Tiberiu  Mazilu, PhD, our officer and director.  The promissory note calls for quarterlyinterest payments to Dr. Mazilu commencing on September 30,2002, with the interest payment calculated quarterly and based on the primeinterest rate plus 1.25%.  The principalamount of the note is due on January 2, 2005 but would become due andpayable by us immediately upon the consolidation or merger of the Company (“AML”)into another entity, the death of Dr. Mazilu, orour termination of Dr. Mazilu’s employment withus. On November 2, 2004, the Board of Directors approved the early payoffof this note payable. This note is scheduled to be paid in full by November 30,2004.

 

In December 2002,we entered into a non-cancelable capital lease to acquire test equipment valuedin aggregate at approximately $50,000. The terms of the lease call for 36 equalmonthly payments of $1,699 commencing in December 2002 and at an annualinterest rate of 13.7%.

 

In July 2003,we raised $245,000 ($100,000 of which was a conversion from an advance receivedin June 2003) from current officers and directors and $43,000 from otherinvestors in the form of notes payable with warrants attached. The funds wereused for working capital. The promissory notes bear interest at the rate of 8%and have a two-year maturity. Warrants to purchase a total of 240,000 shares ofour common stock were issued in connection with the funding.  The per share exercise price of the warrantsis $0.24.  The warrants expire five yearsfrom the date of issuance.  We havevalued these warrants at $35,000 and are expensing this value over the term ofthe notes payable.  For the three monthsended September 30, 2004, a total of $9,000 was charged to theconsolidated statement of operations. On November 2, 2004, the Board ofDirectors approved the early payoff of these notes payable. These notes arescheduled to be paid in full by November 30, 2004.

 

On July 6,2004, we terminated our agreement with Silicon Valley Bank and entered into anew financing agreement with Bridge Bank. The Company incurred a $25,000 earlytermination fee in connection with the termination of the Receivables Financingagreement with Silicon Valley Bank.

 

At September 30,2004, we had a line of credit agreement with Bridge Bank with credit limit of$1,500,000, of which $1,000,000 may be used for cash advances against accountsreceivables and $500,000 may be used for equipment advances. At September 30,2004 we had an outstanding balance of $100,000 under this agreement.  Our ability to borrow under this agreementvaries based upon eligible accounts receivable and eligible equipmentpurchases.  We are obligated to pay thebank a finance charge at a rate per year equal to the prime rate, which in noevent shall be less than 4.00%, plus 2.0% with respect to cash advances and arate of such prime rate plus 3.5% with respect to equipment advances. We mustmaintain certain financial requirements, including net profit after tax, on aquarterly basis, of at least $0.01, and a debt service coverage ratio of atleast 1.25 to 1.00 with respect to equipment advances. We were in compliancewith these requirements at September 30, 2004, however, there is noassurance that we will be in compliance at future dates. This agreementterminates on July 7, 2005 or upon a date that the bank chooses toterminate the agreement.  Any unpaidbalance is due and payable pursuant to the agreement on the terminationdate.  If the agreement is terminatedwithin the first 12 months following its execution on July 6, 2004, wegenerally are required to pay a $15,000 fee to the bank.  At September 30, 2004, our remainingavailable borrowing capacity under this agreement was approximately $856,000.

 

At September 30,2004, we had $1,820,000 in cash and cash equivalents, compared to cash and cashequivalents of $629,000 at September 30, 2003. Our operating activitiesprovided cash of approximately $121,000, a result of increased profits due tohigher revenues. Cash provided from investing activities amounted to $805,000,primarily as a result of the MPI acquisition, inwhich cash received in the acquisition was $1,150,000 offset by $346,000 forthe purchases of property and equipment. Cash used in financing activities was$83,000, which was a direct result of paying down balances on our leaseobligations of $81,000 and payments on notes payable of an aggregate $22,000,offset by $20,000 in proceeds from our line of credit. At September 30,2003, cash from operating activities was $15,000, a result

 

16

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of increased receivablescombined with a decrease in inventories and accrued liabilities.  Cash provided by financing activities at September 30,2003 was $39,000; $48,000 from the sale of fixed assets offset by $9,000 inpurchases of production equipment. Cash provided from financing activities at September 30,2003 was $380,000. Of this amount $288,000 derived from investors, $117,000from our Accounts Receivable Financing Agreement, offset by $26,000 inconnection with principal payments on capital lease obligations.  In addition, we received $1,000 from theinvestment of stock options.

 

Ourprimary need for capital during the next twelve months, subject to change, isto fund anticipated capital expenditures of approximately $530,000 as well asour operations, which consist of our sales, marketing and administrativeactivities, working capital associated with increased product sales, andcontinued product design and development efforts. Our future liquidity willdepend on numerous factors, including the extent to which our present andfuture products gain market acceptance, the costs of sales, marketing andmanufacturing activities, the cost, timing and business management of currentand potential acquisitions and contingent liabilities associated with suchacquisitions, and the extent to which products under development aresuccessfully developed.

 

Ourcurrent financial plan indicates that our available cash and cash equivalents,together with cash expected to be generated from future operations andborrowings expected to be available under our line of credit, which are subjectto our compliance with existing financial requirements, should be sufficient tofund our operations through 2004 and to September 30, 2005. If necessary,we may be required to raise additional capital in the future through one ormore of the following: (1) sale of equity or debt securities; (2) obtainingnew loans; or (3) sale of assets, products or marketing rights. There isno guarantee that additional capital will be available from these sources onacceptable terms, if at all, and certain of these sources may require approvalby existing lenders. If we cannot raise the additional funds through theseoptions on acceptable terms or with the necessary timing, management could alsoreduce discretionary spending to decrease our cash burn rate through actionssuch as delaying or canceling product development projects or marketing plans.These actions would likely extend the then available cash and cash equivalents,and then available borrowings.

 

**CriticalAccounting Policies**

** **

Ourdiscussion and analysis of our financial conditions and results of operationsare based upon our financial statements, which have been prepared in accordancewith generally accepted accounting principles in the United States. Thepreparation of financial statements requires managers to make estimates anddisclosures on the date of the financial statements. On an on-going basis, weevaluate our estimates, including, but not limited to, those related to revenuerecognition. We use authoritative pronouncements, historical experience andother assumptions as the basis for making judgments. Actual results coulddiffer from those estimates. We believe that the following critical accountingpolicies affect our more significant judgments and estimates in the preparationof our financial statements.

 

*Revenuerecognition.*  Wegenerate our revenue through the sale of products.  Our policy is to recognize revenue when theapplicable revenue recognition criteria have been met, which generally includethe following:

 

•                  *Persuasive evidence of anarrangement exists;*

•                  *Delivery has occurred orservices have been rendered;*

•                  *Price is fixed ordeterminable; and*

•                  *Collectibility**is reasonably assured*

 

Revenuefrom the sale of products is generally recognized after both the goods areshipped to the customer and acceptance has been received, if required. Ourproducts are custom made for our customers, who primarily consist of originalengineer manufacturers (OEMs), and we do not accept returns. Our products areshipped complete and ready to be incorporated into higher level assemblies byour customers. The terms of the customer arrangements generally pass title andrisk of ownership to the customer at the time of shipment.

 

Recordingrevenue from the sale of products involves the use of estimates and managementjudgment. We must make a determination at the time of sale whether the customerhas the ability to make payments in accordance with arrangements. While we doutilize past payment history, and, to the extent available for new customers, publiccredit information in making our assessment, the determination of whether collectibility is reasonably assured is ultimately ajudgment decision that must be made by management.

 

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*Allowancefor Doubtful Accounts*. We maintain an allowance for doubtful accounts receivable based oncustomer-specific allowances, as well as a general allowance. Specificallowances are maintained for customers which are determined to have a highdegree of collectibility risk based on such factors,among others, as: (i) the aging of the accounts receivable balance; (ii) thecustomer’s past payment experience; or (iii) a deterioration in thecustomer’s financial condition, evidenced by weak financial condition and/orcontinued poor operating results, reduced credit ratings, and/or a bankruptcyfiling. In addition to the specific allowance, the Company maintains a generalallowance for all its accounts receivables which are not covered by a specificallowance. The general allowance is established based on such factors, amongothers, as: (i) the total balance of the outstanding accounts receivable,including considerations of the aging categories of those accounts receivable; (ii) pasthistory of uncollectible accounts receivable write-offs; and (iii) theoverall creditworthiness of the customer base. A considerable amount ofjudgment is required in assessing the realizabilityof accounts receivables. Should any of the factors considered in determiningthe adequacy of the overall allowance change, an adjustment to the provisionfor doubtful accounts receivable may be necessary.

 

*Inventory.*  Inventories are stated at the lower of costor market, cost being determined on the first-in, first-out method. Inventoriesare written down if the estimated net realizable value is less than therecorded value. We review the carrying cost of our inventories by product eachquarter to determine the adequacy of our reserves for obsolescence. Inaccounting for inventories we must make estimates regarding the estimated netrealizable value of our inventory. This estimate is based, in part, on ourforecasts of future sales and age of the inventory.

 

*IntangibleAssets*

 

We test intangible assetswith indefinite lives for impairment on an annual basis or more frequently ifcertain events occur.  If the assets areconsidered to be impaired, the impairment to be recognized will be measured bythe amount by which the carrying amount exceeds the fair value of the assets.

 

For our intangible assetswith finite lives, including our customer lists, existing technology, andpatents, we amortize the costs of the assets over their useful lives and assessimpairment at least annually or whenever events and circumstances suggest thecarrying value of an asset may not be recoverable.

 

Determining the life ofthe assets with finite lives is judgmental in nature and involves the use ofestimates and assumptions. These estimates and assumptions involve a variety offactors, including future market growth and conditions, forecasted revenues andcosts and a strategic review of our business and operations. We base our fairvalue estimates on assumptions we believe to be reasonable but that areunpredictable and inherently uncertain. Actual future results may differ fromthose estimates. In the event we determine that an intangible asset is impairedin the future, an adjustment to the value of the asset would be charged toearnings in the period such determination is made.

 

# ***Existing Technology***

 

Our existing technologyis based on a patent issued in 1990, which continues to be the main technologyof MPI.  It isa substrate deposition technology that is mature and with no replacementtechnology forecasted.  Managementbelieves the current useful life of 12 years is appropriate.

 

18

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**AdditionalFactors That May Affect Future Results**

 

Futureoperating results may be impacted by a number of factors that could causeactual results to differ materially from those stated herein, which reflectmanagement’s current expectations. These factors include:

 

•                                          industry-specificfactors (including the reliance upon growth of the defense microwave market,significant competition characterized by rapid technological change, newproduct development, product obsolescence, and significant price erosion overthe life of a product);

 

•                                          our abilityto timely develop and produce commercially viable products at competitiveprices;

 

•                                          our abilityto produce products which meet the quality standards of both existing andpotential new customers;

 

•                                          our abilityto accurately anticipate customer demand;

 

•                                          our abilityto manage expense levels, in light of varying revenue streams;

 

•                                          theavailability and cost of components;

 

•                                         the impact ofworldwide economic and political conditions on our business; and

 

•                                         The ability tointegrate current and potential future acquisitions into our existingoperations.

 

Webelieve that, to the extent that foreign sales are recognized, we may faceincreased risk associated with political and economic instability, compliancewith foreign regulatory rules governing export requirements, tariffs andother trade barriers, differences in intellectual property protections, longeraccounts receivable cycles, currency fluctuations and general traderestrictions. If any of these risks materialize, they could have a materialadverse effect on our business, results of operations, and financial condition.

 

We have evaluated thecredit exposure associated with conducting business with foreign customers andhave concluded that such risk is acceptable. Nevertheless, any significantchange in the economy or a deterioration in UnitedStates trade relations or the economic or political stability of foreignmarkets could have a material adverse effect on our business, results ofoperations, and financial condition.

 

Salesto foreign customers are invoiced in U.S. dollars. Accordingly, we currently donot engage in foreign currency hedging transactions. However, as we expandfurther into foreign markets, we may experience greater risk associated withgeneral business, political and economic conditions in those markets. At suchtime, we may seek to lessen our exposure through currency hedging transactions.We cannot assure you that a currency hedging strategy would be successful inavoiding currency exchange related losses. In addition, should the relativevalue of the U.S. dollar in comparison to foreign currencies increase, theresulting increase in the price of our products to foreign customers couldresult in decreased sales which could have a material adverse impact on ourbusiness, results of operations, and financial condition.

 

Weexperience significant price competition and expect price competition in thesale of our products to remain intense. We cannot assure you that ourcompetitors will not develop new technologies or enhancements to existingproducts or introduce new products that will offer superior price orperformance features. We expect our competitors to offer new and existingproducts at prices necessary to gain or retain market share. Several of ourcompetitors have substantial financial resources, which may enable them towithstand sustained price competition or a downturn in the pricing of theirproducts in the future. Substantially all of our competitors have, andpotential future competitors could have, substantially greater technical,marketing, distribution and other resources than we do and have, or could have,greater name recognition and market acceptance of their products andtechnologies.

 

The markets in which we compete are characterized byrapidly changing technology and continuous improvements in products andservices.  Our future success depends onour ability to enhance our current products and to develop and introduce, in atimely manner, new products that keep pace with technological developments,that meet or exceed industry standards, that competeeffectively on the basis of price, performance and quality, that adequatelyaddress OEM customer and end-user customer requirements, and that achievemarket acceptance.  We believe that toremain competitive in the future we will need to continue to develop newproducts, which will require the investment of significant financial resourcesin new product development.  In the eventour newly developed products are not timely developed or do not gain marketacceptance, our business, results of operations and financial condition couldbe materially adversely affected.

 

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Ourquarterly and annual results have in the past been, and will continue to be,subject to significant fluctuations due to a number of factors, any of whichcould have a material adverse effect on our business, financial condition andresults of operations. There can be no assurance that we will not experiencesuch fluctuations in the future. We establish our expenditure levels forproduct development and other operating expenses based on expected revenues,and expenses are relatively fixed in the short term. As a result, variations intiming of revenues can cause significant variations in quarterly results ofoperations. There can be no assurances that we will be profitable on aquarter-to-quarter basis in the future. We believe that period-to-periodcomparisons of our financial results are not necessarily meaningful and shouldnot be relied upon as an indication of future performance. Due to thesefactors, it is likely that in some future quarter or quarters our revenues oroperating results will not meet the expectations of public stock marketanalysts or investors. In such event, the market price of our common stockwould be materially adversely affected.

 

**Item 3**.           Controls andProcedures

** **

*a)  Evaluation ofdisclosure controls and procedures.  Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of the our management,including our Chief Executive Officer and Director of Finance, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended. Based upon that evaluation,our Chief Executive Officer and Director of Finance concluded that ourdisclosure controls and procedures were effective as of the end of theapplicable period to ensure that information required to be disclosed by theCompany in reports that it files or submits under the Exchange Act (i)  isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms and (ii)  isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Director of Finance, as appropriate to allow timely decisionsregarding required disclosures.*

* *

(b) *Changes in internal controls over financial reporting*. Therewas no change in our internal control over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

#### **PART II – OTHER INFORMATION**

#### ** **

**Item 1.  Legal Proceedings**

 

**NotApplicable**

** **

**Item 2. Unregistered Sales of Equity and Use of Proceeds**

** **

**On August 20,2004, we filed a quarterly report on Form 10-QSBdisclosing that we had issued 2,117,362 shares of our common stock toshareholders of MPI for a total consideration of$3,028,000, and 20,090 shares to a business broker in connection with theacquisition of MPI. In that report, the number ofshares and the date of the issuance of the shares wasincorrectly reported. Pursuant to the acquisition agreement, 2,117,108 sharesas consideration for the acquisition and 21,174 shares to be issued to thebroker were committed, or authorized for issuance by our board of directors, asof June 18, 2004. The closing of the acquisition of MPIoccurred on June 18, 2004. See Note 9 to the Financial Statements under Part I,Item 1 for a more detailed description of the acquisition.**

** **

BetweenJuly 19, 2004 and August 3, 2004, we issued 2,117,108 shares of ourcommon stock to shareholders of MPI as considerationfor the acquisition, and 21,174 shares of our common stock to Reuven  Sadeh as finder’s feespursuant to the acquisition agreement. These transactions were effected under Section 4(2) ofthe Securities Act of

 

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1933, as amended. Therewere no other shares of unregistered common stock issued by us for the threemonth period ended September 30, 2004.

 

Therecipients of securities in the above-described transactions represented theirintention to acquire the securities for investment only and not with a view toor for sale in connection with any distribution thereof and appropriate legendswere affixed to the share certificates and other instruments issued in suchtransaction. The recipients either received adequate information about us orhad access, through other relationships, to such information.”

 

**Item 3. Defaults Upon Senior Securities**

** **

**NotApplicable**

** **

**Item 4. Submission of Matters to a Vote of Security Holders**

** **

Our2004 annual meeting of stockholders (the “2004 Annual Meeting”) was held on September 2,2004 in Camarillo, California. Two proposals, as described in our ProxyStatement dated July 29, 2004, were voted on at the meeting. Following isa brief description of the matters voted upon and the results of the voting:

 

1.               Electionof Directors

 
| **Nominees**           | ** ** | **Number of Shares** | ** ** |
|------------------------|------------|----------------------|------------|
|                   |       |                 |       |   |   |
| Tiberiu  Mazilu, Ph.D. |       | For:                 |       | 8,701,325 |   |
|                   |       | Withheld:            |       | 46,774 |   |
|                   |       |                 |       |   |   |
| Richard W. Flatow      |       | For:                 |       | 8,709,929 |   |
|                   |       | Withheld:            |       | 38,170 |   |
|                   |       |                 |       |   |   |
| Edwin J. McAvoy        |       | For:                 |       | 8,709,929 |   |
|                   |       | Withheld:            |       | 38,170 |   |
|                   |       |                 |       |   |   |
| David A. Derby         |       | For:                 |       | 8,701,325 |   |
|                   |       | Withheld:            |       | 46,774 |   |
|                   |       |                 |       |   |   |
| Jacob Inbar            |       | For:                 |       | 8,701,325 |   |
|                   |       | Withheld:            |       | 46,774 |   |
|                   |       |                 |       |   |   |
| Gerald M. Starek       |       | For:                 |       | 8,727,129 |   |
|                   |       | Withheld:            |       | 20,670 |   |

 

2. Ratification of theAppointment of Singer Lewak  Greenbaum &Goldstein as our Independent Auditors

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 8,725,290 |       | 11,850      |       | 10,959      |       | 0                    |       |

 

**Item 5.**           Other Information

** **

**Notapplicable**

 

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**Item 6.**           Exhibits

** **

(a)                                            Exhibits

 
| 2.1   |   | Merger Agreement  entered into as of May 25, 2004 by and among AML Communications, Inc.,  a Delaware corporation, AML Holdings, LLC, a California limited liability  company and Microwave Power, Inc., a California corporation. (1) |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |   | Certificate of  Incorporation (2)                                                                                                                                                                                                                    |
| 3.2   |   | Bylaws(2)                                                                                                                                                                                                                                            |
| 10.1  |   | Form of  Indemnity Agreement(2)                                                                                                                                                                                                                 |
| 10.2  |   | Lease, dated March 11,  1996, between the Company and Parr-Bohn Properties, Ltd. II, a California  Limited Partnership(3)                                                                                                                       |
| 10.3  |   | Intellectual  Property Security Agreement.(4)                                                                                                                                                                                                        |
| 10.4  |   | Loan and  Security Agreement dated November 10, 2000 between the Company and  Silicon Valley Bank. (5)                                                                                                                                          |
| 10.5  |   | Intellectual  Property Security Agreement dated November 10, 2000 between the Company  and Silicon Valley Bank. (5)                                                                                                                             |
| 10.6  |   | Warrant to  purchase stock dated November 9, 2000 between the Company and Silicon  Valley Bank. (5)                                                                                                                                             |
| 10.7  |   | Accounts  Receivable Purchase Agreement dated November 20, 2001 between AML  Communications Inc. and Silicon Valley Bank. (6)                                                                                                                   |
| 10.8  |   | Promissory Note  dated December 30, 2001 between Tiberiu, Mazilu, and AML Communications Inc.(6)                                                                                                                                                |
| 10.9  |   | Accounts  Receivable Purchase Modifications Agreement dated September 24, 2003  between Silicon Valley Bank and AML Communications (7)                                                                                                          |
| 10.10 |   | Form of  Promissory Note date July 16, 2003 between the Company and the  following: Jacob Inbar, Tiberiu  Mazilu, Edwin McAvoy,  Gerald Starek, Bob M. Hawkins, and The Oliver  Family Trust (7)                                           |
| 10.11 |   | Form of  Warrant dated July 16, 2003 between the Company and the following: Jacob  Inbar, Tiberiu  Mazilu, Edwin McAvoy, Gerald Starek, Bob M. Hawkins, and The Oliver Family Trust (7)                                               |
| 10.12 |   | Fourth Amended  and Restated 1995 Stock Option Agreement at June 10, 2002 (8)                                                                                                                                                                   |
| 10.14 |   | Parr-Bohn Properties  First Amendment to lease of 1000 Avenida  Acaso, Camarillo, CA. (8)                                                                                                                                                       |
| 10.15 |   | Employment  Agreement with Dr. Marina Bujalti, of MPI, dated June 18, 2004.(8)                                                                                                                                                             |
| 10.16 |   | Employment  Agreement with Dr. Franco Sechi, of MPI, dated June 18, 2004.(8)                                                                                                                                                               |
| 10.17 |   | Interim Lease  and Proposed Lease Terms (9)                                                                                                                                                                                                          |
| 10.18 |   | Financing  Agreement dated July 8, 2004 with Bridge Bank.(10)                                                                                                                                                                                   |
| 10.19 |   | Enterprise  Agreement Number 4627 dated August 26, 2004 (11) *                                                                                                                                                                                  |
| 31.1  |   | Certification of  Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley Act of 2002  (12)                                                                                                                                                    |
| 31.2  |   | Certification of  Director of Finance Pursuant to 302 of the Sarbanes-Oxley Act of 2002 (12)                                                                                                                                                         |
| 32.1  |   | Certification of  Chief Executive Officer Pursuant to 906 of the Sarbanes-Oxley Act of 2002  (12)                                                                                                                                                    |
| 32.2  |   | Certification of  Director of Finance Pursuant to 906 of the Sarbanes-Oxley Act of 2002 (12)                                                                                                                                                         |

 

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*    Confidential treatmentrequested as to certain portions, which portions were omitted and filedseparately with the Securities and Exchange Commission.

 
|   |   |                                                                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)    |   | Previously filed  with the Securities and Exchange Commission as Exhibit 10.13 to the  Company’s Form 10-KSB for the fiscal  year ended March 31, 2004.                             |
| (2)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Registration  Statement on Form SB-2 No. 33-99102-LA and  incorporated herein by reference.                |
| (3)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 10-KSB for fiscal year ended March 31, 1996 and  incorporated herein by reference.     |
| (4)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSB for the quarter ended December 31, 1999 and  incorporated herein by reference.  |
| (5)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSB for the quarter ended September 30, 2000 and  incorporated herein by reference. |
| (6)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSB for the quarter ended December 31, 2001 and  incorporated herein by reference.  |
| (7)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSB for the quarter ended December 31, 2002 and  incorporated herein by reference.  |
| (8)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 10-KSB for the fiscal year ended March 31, 2004.                                       |

 

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| (9)  |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 8-K  dated July 6, 2004.                    |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10) |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSB for the quarter ended June 30, 2004. |
| (11) |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s Form 8-K  dated September 1, 2004.               |
| (12) |   | Filed herewith.                                                                                                                                              |

 

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#### **SIGNATURES**

#### ** **

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   | AML  Communications, Inc.                                |
|--------|---------------------------------------------------------------|
|   |                                                          |
|   |                                                          |
| Date:  | April 18,  2005                                          | /s/ Jacob Inbar |   |
|   | Jacob Inbar                                                   |
|   | Chairman of the Board, President  and Chief Executive Officer |
|   |                                                          |
|   |                                                          |
| Date:  | April 18,  2005                                          | /s/ Susan J.  Kelley |   |
|   | Susan J. Kelley,  Formerly: Susan J. Fite                     |
|   | Director of Finance and  Principal Accounting Officer         |
|        |                                                               |  |  |  |

 

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