**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM10-QSB**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       |                                                                                          |
|       | ** ** | **For the  quarterly period ended:     December 31, 2005**           |
|       |       |                                                                                          |
|       |       | **or**                                                                                        |
|       |       |                                                                                          |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from               to**

 

**Commission File Number:                0-27252**

 

**AMLCOMMUNICATIONS, INC.**

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

 
| **Delaware**                             |   | **77-0130894**      |
|------------------------------------------|--------|---------------------|
| (State or Other jurisdiction of          |   | (IRS Employer       |
| incorporation or organization)           |   | 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)has filed 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)has been subject to such filing requirements for the past 90 days.

 

Yes ý No o

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

 

Yes o No ý

 

State the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

Common Stock Outstanding as of **February 3**, 2006: 10,077,866 shares

Transitional Small BusinessDisclosure Format: Yes oNo ý

 

 

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**AML Communications, Inc.**

 
|        | **Index to  Form 10-QSB**                                                                                                                                                          | ** ** |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|        | ** **                                                                                                                                                                         | ** ** |
| Item 1.     | Financial Statements (Unaudited)                                                                                                                                                   |       |
|        |                                                                                                                                                                               |       |
|        | Balance Sheet  as of December 31, 2005                                                                                                                                             |       |
|        |                                                                                                                                                                               |       |
|        | Statements of  Operations for the three month periods ended December 31, 2005 and December 31,  2004 and for the nine month periods ended December 31, 2005 and December 31,  2004 |       |
|        |                                                                                                                                                                               |       |
|        | Statements of  Cash flows for the nine month periods ended December 31, 2005 and December  31, 2004                                                                                |       |
|        |                                                                                                                                                                               |       |
|        | Notes to  Financial Statements                                                                                                                                                     |       |
|        |                                                                                                                                                                               |       |
| Item 2.     | Management’s Discussion and Analysis or  Plan of Operation.                                                                                                                   |       |
|        |                                                                                                                                                                               |       |
| Item 3.     | Controls and Procedures                                                                                                                                                            |       |
|        |                                                                                                                                                                               |       |
| **Part II** | **Other Information**                                                                                                                                                              | ** ** |
|        |                                                                                                                                                                               | ** ** |
| Item 1.     | Legal Proceedings                                                                                                                                                                  |       |
|        |                                                                                                                                                                               |       |
| Item 2.     | Unregistered Sales of Equity Securities 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                                                                                                                                                                         |       |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED CONDENSED BALANCE SHEET**

**(unaudited)**

 
| ** **                                                                                                                   | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                   | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                   | ** ** | ** **             | ** ** |
| Current Assets:                                                                                                              |       |                   |       |
| Cash and cash equivalents                                                                                                    |       | $                      | 1,725,000  |   |
| Accounts receivable, net of allowance for  doubtful accounts of $60,000                                                      |       | 1,264,000              |       |
| Inventories, net                                                                                                             |       | 1,640,000              |       |
| Other current assets                                                                                                         |       | 105,000                |       |
| Total current assets                                                                                                         |       | 4,734,000              |       |
|                                                                                                                         |       |                   |       |
| Property and Equipment, at cost                                                                                              |       | 4,255,000              |       |
| Less: Accumulated depreciation and  amortization                                                                             |       | 3,347,000              |       |
| Property and Equipment, net                                                                                                  |       | 908,000                |       |
| Intangible Assets:                                                                                                           |       |                   |       |
| Technologies, net                                                                                                            |       | 830,000                |       |
| Patents, Net                                                                                                                 |       | 152,000                |       |
| Customer lists, net                                                                                                          |       | 160,000                |       |
| Trademarks                                                                                                                   |       | 181,000                |       |
| Long-term cash investments                                                                                                   |       | 755,000                |       |
| Other Assets                                                                                                                 |       | 16,000                 |       |
| Total Assets                                                                                                                 |       | $                      | 7,736,000  |   |
|                                                                                                                         |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |       |                   |       |
|                                                                                                                         |       |                   |       |
| Current Liabilities:                                                                                                         |       |                   |       |
| Line of Credit                                                                                                               |       | $                      | 314,000    |   |
| Accounts payable                                                                                                             |       | 156,000                |       |
| Current portion of capital lease  obligations                                                                                |       | 1,000                  |       |
| Accrued expenses:                                                                                                            |       |                   |       |
| Accrued payroll and payroll related  expenses                                                                                |       | 324,000                |       |
| Accrued income taxes                                                                                                         |       | (2,000                 | )          |
| Other accrued liabilities                                                                                                    |       | 168,000                |       |
| Total current liabilities                                                                                                    |       |                   | 961,000    |   |
|                                                                                                                         |       |                   |       |
| Stockholders’ Equity:                                                                                                   |       |                   |       |
| Common stock, $0.01 par value:15,000,000  shares authorized; 10,121,991 shares issued and outstanding at December 31,  2005. |       | 101,000                |       |
| Capital in excess of par value                                                                                               |       | 13,421,000             |       |
| Accumulated deficit                                                                                                          |       | (6,747,000             | )          |
| Total stockholders’ equity                                                                                              |       | 6,775,000              |       |
| Total liabilities and stockholder’s equity                                                                              |       | $                      | 7,736,000  |   |

 

The accompanying notes are an integral partof these financial statements.

 

3

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**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Month Periods Ended** | ** ** | **Nine Month Periods Ended** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **December 31,  2005**        | ** ** | **December 31,  2004**       | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Net sales                                                              |       | $                             | 2,495,000  |                         | $          | 2,284,000 |   | $ | 7,523,000 |   | $ | 6,340,000 |   |
| Cost of goods sold                                                     |       | 1,295,000                     |       | 1,146,000                    |       | 4,061,000 |   | 3,483,000 |   |
| Gross profit                                                           |       | 1,200,000                     |       | 1,138,000                    |       | 3,462,000 |   | 2,857,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Operating expenses:                                                    |       |                          |       |                         |       |   |   |   |   |
| Selling, general & administrative                                  |       | 591,000                       |       | 521,000                      |       | 1,739,000 |   | 1,467,000 |   |
| Research and development                                               |       | 303,000                       |       | 226,000                      |       | 902,000 |   | 609,000 |   |
| Total operating expenses                                               |       | 894,000                       |       | 747,000                      |       | 2,641,000 |   | 2,076,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Income from operations                                                 |       | 306,000                       |       | 391,000                      |       | 821,000 |   | 781,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Other income (expense), net                                            |       | (5,000                        | )          | (12,000                      | )          | 3,000 |   | (59,000 | ) |
| Income before provision for income taxes                               |       | 301,000                       |       | 379,000                      |       | 824,000 |   | 722,000 |   |
| Provision for income taxes                                             |       | 7,000                         |       | —                       |       | 23,000 |   | — |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Net income                                                             |       | $                             | 294,000    |                         | $          | 379,000 |   | $ | 801,00 |   | $ | 722,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Basic earnings per common share                                        |       | $                             | 0.03       |                         | $          | 0.04 |   | $ | 0.08 |   | $ | 0.08 |   |
| Basic weighted average number of shares of  common stock outstanding   |       | 10,101,000                    |       | 9,982,000                    |       | 10,086,000 |   | 9,119,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Diluted earnings per common share                                      |       | $                             | 0.03       |                         | $          | 0.03 |   | $ | 0.07 |   | $ | 0.07 |   |
| Diluted weighted average number of shares  of common stock outstanding |       | 10,787,000                    |       | 11,933,000                   |       | 10,724,000 |   | 11,070,000 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

4

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**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Nine Month Periods Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **December 31, 2005**        | ** ** | **December 31, 2004** | ** ** |
| Cash Flows from Operating Activities:                                              |       |                         |       |   |   |
| Net Income                                                                         |       | $                            | 801,000    |   | $ | 722,000 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                         |       |   |   |
| Debt discount fees                                                                 |       | —                       |       | 22,000 |   |
| Depreciation                                                                       |       | 243,000                      |       | 194,000 |   |
| Bad debt expense                                                                   |       | 10,000                       |       | 11,000 |   |
| Inventory Reserves                                                                 |       | (116,000                     | )          | 162,000 |   |
| Amortization                                                                       |       | 162,000                      |       | 130,000 |   |
| Loss (Gain) on sale of fixed assets                                                |       | (1,000                       | )          | — |   |
| Changes in assets and liabilities:                                                 |       |                         |       |   |   |
| Decrease (increase) in:                                                            |       |                         |       |   |   |
| Accounts receivable                                                                |       | 17,000                       |       | (149,000 | ) |
| Inventories                                                                        |       | 205,000                      |       | (190,000 | ) |
| Other current assets                                                               |       | 47,000                       |       | 23,000 |   |
| Increase (decrease) in:                                                            |       |                         |       |   |   |
| Accounts payable                                                                   |       | (91,000                      | )          | (376,000 | ) |
| Accrued state income taxes                                                         |       | (20,000                      | )          | (8,000 | ) |
| Accrued expenses                                                                   |       | (78,000                      | )          | (129,000 | ) |
| Net cash provided by operating activities                                          |       | 1,179,000                    |       | 412,000 |   |
|                                                                               |       |                         |       |   |   |
| Cash Flows from Investing Activities:                                              |       |                         |       |   |   |
| Purchases of property and equipment                                                |       | (505,000                     | )          | (404,000 | ) |
| Proceeds for the sale of property and  equipment                                   |       | 1,000                        |       | 34,000 |   |
| Long-term cash investments                                                         |       | (755,000                     | )          | — |   |
| Cash received in the MPI acquisition                                               |       |                         |       | 1,150,000 |   |
| Net cash (used in) provided by investing  activities                               |       | (1,259,000                   | )          | 780,000 |   |
|                                                                               |       |                         |       |   |   |
| Cash Flows from Financing Activities:                                              |       |                         |       |   |   |
| Proceeds from exercise of stock options                                            |       | 35,000                       |       | — |   |
| Proceeds form exercise of warrants                                                 |       | —                       |       | 9,000 |   |
| Proceeds from line of credit, net                                                  |       | 234,000                      |       | 5,000 |   |
| Proceeds from notes payable - related  parties                                     |       | —                       |       | (295,000 | ) |
| Proceeds from notes payable - investors                                            |       | —                       |       | (43,000 | ) |
| Principal payments on capital lease  obligations, net                              |       | (52,000                      | )          | (107,000 | ) |
| Net cash provided (used in) by financing  activities                               |       | 217,000                      |       | (431,000 | ) |
|                                                                               |       |                         |       |   |   |
| Net increase in Cash and Cash Equivalents                                          |       | 137,000                      |       | 761,000 |   |
| Cash and Cash Equivalents, beginning of  period                                    |       | 1,588,000                    |       | 977,000 |   |
| Cash and Cash Equivalents, end of period                                           |       | $                            | 1,725,000  |   | $ | 1,738,000 |   |
|                                                                               |       |                         |       |   |   |
| Supplemental disclosures of cash flow  information:                                |       |                         |       |   |   |
| Cash paid during the period for:                                                   |       |                         |       |   |   |
| Interest                                                                           |       | $                            | 25,000     |   | $ | 83,000 |   |
|                                                                               |       |                         |       |   |   |
| Income Taxes                                                                       |       | $                            | 23,000     |   | $ | — |   |

 

The accompanying notes are an integral partof these financial statements.

 

5

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**AML COMMUNICATIONS, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

** December 31, 2005**

 

**1.             Basis of Presentation**

 

We currently design, manufacture, and market radiofrequency (RF) and microwave, low noise, medium and high power amplifiers for avariety of frequency ranges and transmission protocols serving primarily thedefense microwave market. Our business is comprised of two reportable segmentsconsisting of amplifiers, subsystems, and related products that are designed,manufactured, and marketed by AML Communications, Inc. for the defensemicrowave and wireless communications market, and high power microwaveamplifiers that are designed, manufactured, and marketed by our divisionMicrowave Power, Inc. (MPI) for the defense market. Our defense industryproducts are used primarily in electronic systems for tactical aircraft, ships,ground systems, and missile systems. These products are sold directly by us aswell as through independent sales representatives. We had two reportablesegments in December 2005 and two reportable segments in December 2004.

 

The accompanying financial statements have been prepared in conformitywith accounting principles generally accepted in the United States. However,certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been omitted or condensed pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). In the opinionof management, all adjustments (consisting of normal recurring adjustments)necessary for a fair presentation have been included. The results of operationsand cash flows for the three month periods and nine month periods presented arenot necessarily indicative of the results of operations for a full year. Thesefinancial statements should be read in conjunction with the Company’s March 31,2005 audited financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB.

 

**2.             Earnings Per Share**

 

**Statement of FinancialAccounting Standards No. 128, “Earnings per share” requires the presentation ofbasic earnings per share and diluted earnings per share. Basic and dilutedearnings per share computations are presented by the Company conform to thestandard and are based on the weighted average number of shares of Common Stockoutstanding during the year.**

 

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

 

**The Company had approximately1,914,503 granted stock options and warrants that were exercisable as ofDecember 31, 2005 and approximately 1,951,000 of granted stock options andwarrants exercisable at December 31, 2004.**

** **

**The following is areconciliation of the numerators and denominators of the basic and dilutedearnings per share computations:**

** **
| **Nine months ended December 31,  2005**    | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                  |       |           |       |       |       |          |       |
| Net income available to common stockholders |       | $              | 801,000    |       | 10,086,000 |          | $          | 0.08 |   |
| Effect of dilutive securities:              |       |           |       |       |       |          |       |
| Stock options                               |       |           |       | 486,000    |       |          |       |
| Warrants                                    |       |           |       | 152,000    |       |          |       |
| Diluted earnings per share:                 |       | $              | 801,000    |       | 10,724,000 |          | $          | 0.07 |   |

** **

**6**

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** **
| **Nine months ended December 31,  2004**    | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic  earnings per shares:                 |       |           |       |       |       |          |       |
| Net income available to common stockholders |       | $              | 722,000    |       | 9,119,000  |          | $          | 0.08 |   |
| Effect of  dilutive securities:             |       |           |       |       |       |          |       |
| Stock options                               |       |           |       | 1,644,000  |       |          |       |
| Warrants                                    |       |           |       | 307,000    |       |          |       |
| Diluted  earnings per share:                |       | $              | 722,000    |       | 11,070,000 |          | $          | 0.07 |   |

** **

**3.**             **Inventories**

 

Inventoriesinclude costs of material, and manufacturing overhead on work in process and finished goods, and are stated at thelower of cost (first-in, first-out) or market and consist of the following:

 

| ** **                    | ** ** | **December 31, 2005** | ** ** |
|-------------------------------|------------|-----------------------|------------|
|                          |       |                  |       |
| Raw  material, net of reserve |       | $                     | 1,114,000  |   |
| Work-in-process               |       | 322,000               |       |
| Finished  goods               |       | 204,000               |       |
|                          |       | $                     | 1,640,000  |   |

 

The reserve for inventory at December 31, 2005 was$401,000.

 

**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 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. Recoverability of assets is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. 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 nine month period ended December 31 2005, the Company recognized no impairment.

 

At December 31, 2005, intangibles consist of the following:

 
| **Intangibles**           | ** ** | **Gross Carrying Amount** | ** ** | **Accumulated Amortization** | ** ** | **Net**  | ** ** |
|---------------------------|------------|---------------------------|------------|------------------------------|------------|----------|------------|
|                      |       |                      |       |                         |       |     |       |
| Amortized  intangibles:   |       |                      |       |                         |       |     |       |
| Patents                   |       | $                         | 189,000    |                         | $          | (37,000  | )          | $ | 152,000 |   |
| Existing Technology       |       | 961,000                   |       | (131,000                     | )          | 830,000  |       |
| Customer List             |       | 339,000                   |       | (179,000                     | )          | 160,000  |       |
|                      |       |                      |       |                         |       |     |       |
| Unamortized  intangibles: |       |                      |       |                         |       |     |       |
| Trademarks                |       | 181,000                   |       | —                       |       | 181,000  |       |
|                      |       | $                         | 1,670,000  |                         | $          | (347,000 | )          | $ | 1,323,000 |   |

 

7

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Due to theacquisition of MPI in the quarter ended June 30, 2004, we recorded the intangible assets above. We assigned an 8 yearlife to patents, a 12 year life to Existing Technology, and a 3 year life toCustomer Lists. All are subject to amortization. The value assigned totrademarks, which have an indefinite life, should not be amortized.

 

Amortization expense from continuing operation for the nine months ended December 31, 2005 was $162,000. We expect amortization expense for the next five years to be as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| 2006                      |       | $          | 216,305    |   |
| 2007                      |       | $          | 216,305    |   |
| 2008                      |       | $          | 122,200    |   |
| 2009                      |       | $          | 103,379    |   |
| 2010                      |       | $          | 103,379    |   |

 

**5**.             **AccountsReceivable Financing**

 

At December 31, 2005, we had a line of credit agreement with BridgeBank. On July 27, 2005, we signed a Business Financing Modification Agreementwith Bridge Bank to renew our line of credit, increasing the credit facilityfrom $1.5 million to $2.0 million. Of this $2.0 million, $1.0 million may beused for cash advances against accounts receivables and $1.0 million may beused for equipment advances. Our ability to borrow under this agreement variesbased upon eligible accounts receivable and eligible equipment purchases. Weare obligated to pay the bank a finance charge at a rate per year equal to theprime rate, which in no event shall be less than 5.50%, plus .25% with respectto cash advances and a rate of such prime rate plus 2.0% with respect toequipment advances. We are obligated to pay an annual facility fee of $5,000(0.50% of the gross facility amount). We must maintain certain financialrequirements, including net profit after tax, on a quarterly basis, of at least$0.01, and a debt service coverage ratio with respect to equipment advances. Wewere in compliance with these requirements at December 31, 2005; however, thereis no assurance that we will be in compliance at future dates. This agreementterminates on July 27, 2006 or upon a date that the bank chooses to terminatethe agreement. Any unpaid balance is due and payable pursuant to the agreementon the termination date. If the agreement is terminated within the first 12months following its execution on July 27, 2005, we will be required to pay anearly termination fee of 1.0% of the credit facility amount under the terms ofthe agreement. At December 31, 2005 we had an outstanding balance of $60,000under this agreement and our remaining borrowing capacity was approximately$558,000 available under the accounts receivable agreement. Under the equipmentfinancing agreement, we had an outstanding balance of $254,000 at December 31,2005, all of which shall be repaid in thirty-six (36) equal monthlyinstallments of principal, plus all accrued finance charges, beginning onDecember 31, 2005. On December 23, 2005 we signed a Business FinancingModification Agreement with Bridge Bank for a second line of credit forequipment advances. Effective January 1, 2006, through June 30, 2006, we mayrequest equipment advances up to an aggregate principal amount of $750,000,with a remaining borrowing capacity of approximately $746,000 available as ofDecember 31, 2005.

 

**6.             Equity Transactions**

* *

For the nine months ended December 31, 2005, the Board of Directors granted 175,000 stock options as employee compensation and 22,500 stock options as director compensation. The options’ prices range from $0.95 to $1.20 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.

 

8

 

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 nine month periods ended December 31, 2005 and December 31, 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.

 
| ** **                                                          | ** ** | **Nine Month Periods Ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **December 31, 2005**        | ** ** | **December 31, 2004** | ** ** |
|                                                                |       |                         |       |   |   |
| Net income as reported                                              |       | $                            | 801,000    |   | $ | 722,000 |   |
| Less: stock-based compensation  expense, net of related tax effects |       | (73,000                      | )          | (89,000 | ) |
| Pro forma net income                                                |       | $                            | 728,000    |   | $ | 633,000 |   |
|                                                                |       |                         |       |   |   |
| Basic earnings per share - as  reported                             |       | $                            | 0.08       |   | $ | 0.08 |   |
| Diluted earnings per share - as  reported                           |       | $                            | 0.07       |   | $ | 0.07 |   |
| Basic earnings per share - pro  forma                               |       | $                            | 0.07       |   | $ | 0.07 |   |
| Diluted earnings per share -  pro forma                             |       | $                            | 0.07       |   | $ | 0.06 |   |

 

**7.****                                      RelatedParty**

 

During the nine month period ended December31, 2005, the Company paid approximately $43,000 to the previous stockholdersof MPI in connection with the property rent for the premises located in SantaClara.

 

On August 1, 2005 we entered into anew Commercial Lease Agreement with Microwave Holdings, LLC for the premiseslocated at 3350 Scott Blvd., Bldg: 25, in Santa Clara, California. The term ofthe lease is August 1, 2005 to September 19, 2006 at a monthly rate of$5,000.00.

 

On February 3, 2006 the company purchasedthe building located at 3350 Scott Blvd. Bldg:25 in Santa Clara, California fora purchase price of $800,000.00.The building is being financed by the Bank ofAmerica in the form of a promissory note in the amount of $640,000.00 and theCompany to pay this loan in 83 regular payments of $4,425.88 each and oneirregular last payment estimated at $556,594.48. The Company’s final payment isdue February 10, 2013 and will be for all principle and interest not yet paid. Paymentsinclude principle and interest.

 

**8.             Listing History**

 

Our commonstock currently trades on NASDAQ’s OTC Bulletin Board under the symbol “AMLJ.OB”.Our common stock traded on the Nasdaq Small Cap Market from October 8,2001 to August 13, 2002 and on the Nasdaq National Market prior to thattime. The Company was de-listed from NASDAQbecause of its failure to meet the $1.00 minimum bid price requirement.

 

**9.             Acquisitions**

 

On May 25, 2004 the Company signed a definitive agreement for theacquisition of Microwave Power, Inc.(“MPI), which was completed June 18, 2004. MPIwas merged into the Company’s wholly owned subsidiary, with the subsidiary asthe surviving entity. The total consideration for the acquisition was$3,028,000. Pursuant to the acquisition agreement, 2,117,108 as considerationfor the acquisition and 21,174 shares to be issued to the broker werecommitted, or authorized for issuance by our board of directors, as June 18,2004. There was no change in MPI’S senior officers, its past President andSecretary, MPI will continue to operate as the company’s division from itsfacility in Santa Clara, CA which is owned by prior shareholders and leased tothe company.

 

9

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The Microwave Power, Inc. (MPI) acquisitionwas driven by a number of key factors including:

 

1)              Technologically, MPI’s semi-monolithic, goldfilled via’s air bridge and microwave-monolithic-ceramic (MMCC)                technology provide access toprocesses that the Company believes are complimentary and additive to thoseavailable to AML prior to the acquisition.

2)              MPI’s product base addresses higher power andhigher frequency sectors of the microwave market. This acquisition is intendedto strengthen the Company’s product offerings to this market by adding higherpower microwave amplifiers.

 

A summary of the unaudited condensed balancesheet 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  & Equipment, net |       | 61,000                        |       |
| Intangibles                    |       | 1,670,000                     |       |
| Total assets  acquired         |       | 3,499,000                     |       |
| Current  Liabilities           |       | (295,000                      | )          |
| Net Assets acquired            |       | $                             | 3,204,000  |   |

 

The purchased intangible assets will be amortized over their usefullives, which range from three to twelve years. Of the $1,670,000 of acquiredintangible assets, $189,000 was assigned to patents (8 year useful life). $961,000was assigned to Existing Technology (12 year useful life), and $339,000 wasassigned to Customer Lists (3 year useful life). The balance of $181,000 wasassigned to trademarks, having as indefinite life, and will be tested annuallyor on an interim basis for impairment. We found no indication of impairment forthe period ended December, 31, 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, subsystems, 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 on the Company’s reportable segments for the three month period ended December 31, 2005 and the nine month period ended December 31, 2005.

 

**For the three months ended December 31, 2005**

** **
| **(In thousands)**                                      | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 1,932      |    | $          | 563             |       | —    |       | $ | 2,495 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | $       | 826        |    | 374        |            | —     |      | $          | 1,200 |   |
| Depreciation  & amortization (includes intangibles) |       | $       | 79         |    | 61         |            | —     |      | $          | 140 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest  expense                                       |       | $       | 15         |    | —     |            | —     |      | $          | 15 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | $       | 601        |    | 144        |            | —     |      | $          | 745 |   |
| Profit from  continuing Operations before tax           |       | $       | 131        |    | $          | 169             |       | —    |       | $ | 300 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable  assets                                    |       | $       | 3,444      |    | $          | 4,292           |       | —    |       | $ | 7,736 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital  Expenditures                                   |       | $       | 58         |    | $          | —          |       | —    |       | $ | 58 |   |
|                                                         |            |         |            |         |            |                 |            |           |            |  |  |  |  |  |  |  |  |

 

10

 

**For the nine months ended December 31, 2005**

 
| **(In thousands)**                                      | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 5,840      |    | $          | 1,683           |       | —    |       | $ | 7,523 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | $       | 2,362      |    | 1,100      |            | —     |      | $          | 3,462 |   |
| Depreciation  & amortization (includes intangibles) |       | $       | 230        |    | 177        |            | —     |      | $          | 407 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest  expense                                       |       | $       | 25         |    | —     |            | —     |      | $          | 25 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | $       | 1,806      |    | 401        |            | —     |      | $          | 2,207 |   |
| Profit from  continuing Operations before tax           |       | $       | 301        |    | $          | 522             |       | —    |       | $ | 823 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable  assets                                    |       | $       | 3,444      |    | $          | 4,292           |       | —    |       | $ | 7,736 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital  Expenditures                                   |       | $       | 503        |    | $          | 2               |       | —    |       | $ | 505 |   |
|                                                         |            |         |            |         |            |                 |            |           |            |  |  |  |  |  |  |  |  |

 

We had tworeportable segments in the three month period and the nine month period endedDecember 31, 2005.

 

**11.          Major customers and vendors**

 

Three customers provided 24% and 40% of net revenue for thenine month periods ended December 31, 2005 and 2004, respectively. Totalaccounts receivable due from these customers was approximately $214,000 and$204,000 as of December 31, 2005 and 2004, respectively.

 

The Company extends credit to its customers based upon itsassessment of their credit worthiness and generally does not requirecollateral. Credit losses have not been significant.

### ** **

Three vendors accounted for 28% and 20% of the Company’s netpurchases for the nine months ended December 31, 2005 and 2004, respectively.Total accounts payable due to these vendors was $21,000 and $0.00 as ofDecember 31, 2005 and 2004, respectively.

 

**12.          Reclassifications**

** **

**Certain comparative amounts have been reclassified toconform with the current year’s presentation.**

 

11

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**Item 2. Management’s Discussion and Analysis orPlan of Operation**

 

Some of the statements made by us in thisQuarterly Report on Form 10-QSB are forward-looking in nature, includingbut not limited to, statements relating to our future revenue, productdevelopment, demand, acceptance and market share, gross margins, levels ofresearch and development, our management’s plans and objectives for our currentand future operations, and other statements that are not historical facts.Forward-looking statements include, but are not limited to, statements that arenot historical facts, and statements including forms of the words “intend”, “believe”,“will”, “may”, “could”, “expect”, “anticipate”, “plan”, “possible”, and similarterms. Actual results could differ materially from the results implied by theforward looking statements due to a variety of factors, many of which arediscussed throughout this Annual Report and particularly in the sections titled“Additional Factors That May Affect Future Results” and “Factors AffectingBusiness, Operating Results and Financial Condition”, both of which areincluded in the section titled “Management’s Discussion and Analysis of Plan ofOperation”. Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof. We undertake no obligationto publicly release any revisions to these forward-looking statements that mayreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events. Factors that could cause actualresults to differ materially from those expressed in any forward-lookingstatement made by us include, but are not limited to:

 

•                      ourability to finance our activities and maintain our financial liquidity;

•                      ourability to attract and retain qualified, knowledgeable employees;

•                      theimpact of general economic conditions on our business;

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

•                      thelimited number of potential customers for our products;

•                      thevariability in gross margins on our products;

•                      ourability to design and market new products successfully;

•                      ourfailure to acquire new customers in the future;

•                      deteriorationof business and economic conditions in our markets;

•                      intenselycompetitive industry conditions with increasing price competition; and

•                      therate of growth in the defense markets.

 

**In this document, the words “we,” “our,”“ours,” and “us” refer to AML Communications, Inc. and our division, MicrowavePower, Inc.**

** **

**Overview**

 

We are basedin southern California and design, manufacture, and market Radio Frequency (RF)and Microwave power and low noise amplifiers for the defense microwave markets.Our defense industry products, which represents approximately 90% of our sales,are used in radar equipment and integrated into electronic systems for tacticalaircraft, ships, ground systems, and missile systems. We continue to support alimited amount of wireless products, which consist of low noise and power amplifiersserving the wireless, PCS, and two-way messaging market, as well as CellularCoverage Enhancement amplifiers. These products represent approximately 10% ofour net sales. The demand for products manufactured by us and used in thedefense industry has been growing during the last two years and is expected tocontinue to grow in the near term. This growth is attributable to an increasein demand for our products by government prime contractors, as well as to ourstrategy to acquire market share. The acquisitionof MPI was part of a strategic move to complement the existing AML product lineand expand our technology base. We will continue to operate MPI from thecurrent facility in Santa Clara, with the current management in place, but planto unify the Web-site of MPI with our Web-site.

 

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**Results of Operations**

** **

**Three Months EndedDecember 31, 2005 Compared to Three Months Ended December 31, 2004**

** **

*Net sales.*Net sales for thethree months ended December 31, 2005 were $2.5 million, as compared to netsales of $2.3 million for the three months ended December 31, 2004, an increaseof $200,000 or 9.2%. The increase was due continued growth in the defensesector. Defense related microwave integrated circuits (MIC) products accountedfor $2.4 million, or 97.4% of net sales for the three months ended December 31,2005, compared to $2.1 million or 89.9% of net sales for the three months endedDecember 31, 2004. The cellular and wireless messaging market produced only$64,000, or 2.6% of net sales for the three months ended December 31, 2005, ascompared to $230,000, or 10.1% of net sales for the three months ended December31, 2004.

 

*Grossprofit.*Gross profit for the three months endedDecember 31, 2005 was $1.2 million, or 48.0% of net sales, compared to a grossprofit of $1.1 million, or 49.8% of net sales for the three months endedDecember 31, 2004. Gross profit, as a percentage of net sales, decreased due toadditional manufacturing overhead costs during the quarter; $31,000 increase indepreciation expense resulting from capital expenditures, a $9,000 increase inmanufacturing process consulting, a $7,000 increase in tools, supplies, andmaintenance costs, offset by $12,000 reduction in salaries and related benefits,resulting from reduced headcount, and a $7,000 reduction in freight costs.

 

*Selling, general and administrative costs.*Selling,general, and administrative costs were $591,000, or 23.6% of net sales, for thethree months ended December 31, 2005, compared to $521,000, or 22.8% of netsales, for the three months ended December 31, 2004. The higher costs wereattributable to a $27,000 increase in salaries and related benefits and a$14,000 increase in commissions in relation to improved revenues.

 

*Research and development costs.*Researchand development costs were $303,000, or 12.1% of net sales, for the threemonths ended December 31, 2005, as compared to $226,000, or 9.8% of net sales,for the three months ended December 31, 2004. The increase was due to a $67,000increase in salaries and related benefits from additional headcount and frompay increases, an $8,000 increase in outside consulting fees, and a $6,000increase for R & D related expenditures, offset by a $10,000 reduction indepreciation expense for assets reaching full depreciation.

 

*Other expense, net.*Other expensewas $5,000 for the three months ended December 31, 2005, as compared to otherexpense of $12,000 for the three months ended December 31, 2004. The decreasedexpense was due to a reduction in interest expense in connection with changingfrom a financed receivables line of credit to a more tradition line of credit,offset by interest income from long-term cash investments. The Company incurredinterest expense of approximately $27,000, offset by interest income of $15,000for the three months ended December 31, 2004.

 

*Provision for income taxes.* Forthe three months ended December 31, 2005, we recorded a provision of $4,000 forfederal AMT taxes and a provision of $3,000 for state AMT taxes, as compared tothe three months ended December 31, 2004, where we recorded no provision due tothe loss carry-forward benefits.

 

*Net income.*Net income was$294,000, or $0.03 per share, for the three months ended December 31, 2005,compared to a net profit of $379,000, or $0.04 per share, for the three monthsended December 31, 2004.

 

**Results of Operations**

** **

**Nine Months EndedDecember 31, 2005 Compared to Nine Months Ended December 31, 2004**

** **

*Net sales.*Net sales for the ninemonths ended December 31, 2005 were $7.5million, as compared to net sales of$6.3 million for the nine months ended December 31, 2004, an increase of $1.2million or 18.6%. Of the increase in net sales, $518,000 is attributable tohaving the MPI facility for the full 275 days during the nine month periodended December 31, 2005, as compared to having the MPI facility for only 196days during the same nine month period in the prior year. The remainder of theincrease is due to continued growth in the defense sector. Defense related MICproducts accounted for $7.4 million, or 98.4% of net sales for the nine monthsended December 31, 2005, compared to $5.7 million or 89.5% of net sales for thenine months ended December 31, 2004. The cellular and wireless messaging marketproduced only $123,000, or 1.6% of net sales for the nine months ended December31, 2005, as compared to $666,000, or 10.5% of net sales for the nine monthsended December 31, 2004.

 

13

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*Grossprofit.*Gross profit for the nine months endedDecember 31, 2005 was $3.5 million, or 46.0% of net sales, compared to a grossprofit of $2.9 million, or 45.0% of net sales for the nine months endedDecember 31, 2004. Gross profit, as a percentage of net sales, recognized nosignificant change.

 

*Selling, general and administrative costs.*Selling,general, and administrative costs were $1.7 million, or 23.1% of net sales, forthe nine months ended December 31, 2005, compared to $1.5 million, or 23.1% ofnet sales, for the nine months ended December 31, 2004. The higher costs wereattributable to a $165,000 increase in salaries and related benefits fromadditional headcount and pay increases, an $18,000 increase in commission andfreight expenses in connection with improved revenues, a $36,000 increase inthe amortization of intangibles, a $23,000 increase in consulting fees, and a$14,000 increase in rent, much of this resulting from having the MPI facilityfor the full 275 days during the nine month period ended December 31, 2005, as comparedto having the MPI facility for only 196 days during the same nine month periodin the prior year.

 

*Research and development costs.*Researchand development costs were $902,000, or 11.9% of net sales, for the nine monthsended December 31, 2005, as compared to $609,000, or 9.6% of net sales, for thenine months ended December 31, 2004. The increase was due to a $268,000increase in salaries and related benefits from additional headcount and frompay increases, an $8,000 increase in outside consulting fees, a $37,000increase for R & D related expenditures, and a $7,000 increase in travelrelated expenses, offset by a $30,000 reduction in depreciation expense forassets reaching full depreciation, much of this resulting from having the MPIfacility for the full 275 days during the nine month period ended December 31,2005, as compared to having the MPI facility for only 196 days during the samenine month period in the prior year.

 

*Other income, net.*Other incomewas $3,000 for the nine months ended December 31, 2005, as compared to otherexpense of $59,000 for the nine months ended December 31, 2004. The change wasdue to the decrease in interest expense from changing over from a financedreceivables line of credit to a more tradition line of credit offset byinterest income from long-term cash investments. For the nine months endedDecember 31, 2004, the Company had $84,000 in interest expenses, offset by$25,000 of interest income.

 

*Provision for income taxes.* Forthe nine months ended December 31, 2005, we recorded a provision of $13,000 forfederal AMT taxes and a provision of $10,000 for state AMT taxes, as comparedto the nine months ended December 31, 2004, where we recorded no provision dueto the loss carry-forward benefits.

 

*Net profit.*Net profit was$801,000, or $0.08 per share, for the nine months ended December 31, 2005,compared to a net profit of $722,000, or $0.08 per share, for the nine monthsended December 31, 2004.

 

**Liquidity and CapitalResources**

 

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

 

Between July 1, 2000 and December 31, 2001, we entered into capitalleases for the purpose of acquiring production and test equipment valued inaggregate at $740,000. The terms of the leases range from 36 months to 60months and the interest charges range from 8.6% to 15.6%. The total amountremaining on the leases at December 31, 2005 wasapproximately $1,000.

 

In December 2002, the Company enteredinto a non-cancelable capital lease to acquire test equipment valued inaggregate 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%. As of December 31, 2005, this lease was completed andno further payments remain.

 

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In July 2003, we raised $245,000($100,000 of which was a conversion from an advance received in June 2003) fromcurrent officers and directors and $43,000 from other investors in the form ofnotes payable with warrants attached. The funds were used for working capital.The promissory notes bear interest at the rate of 8% and have a two-yearmaturity. Warrants to purchase a total of 240,000 shares of our common stockwere issued in connection with the funding. The per share exercise price of thewarrants is $0.24. The warrants expire five years from the date of issuance. Wehave valued these warrants at $35,000 and are expensing this value over theterm of the notes payable. On November 2, 2004, the Board of Directors approvedthe early payoff of these notes payable and these notes were paid in full onNovember 9, 2004. As of December 31, 2005, the number of warrants exercised was52,500.

 

At December 31, 2005, we had a line of credit agreement with BridgeBank. On July 27, 2005, we signed a Business Financing Modification Agreementwith Bridge Bank to renew our line of credit, increasing the credit facilityfrom $1.5 million to $2.0 million. Of this $2.0 million, $1.0 million may beused for cash advances against accounts receivables and $1.0 million may beused for equipment advances. Our ability to borrow under this agreement variesbased upon eligible accounts receivable and eligible equipment purchases. Weare obligated to pay the bank a finance charge at a rate per year equal to theprime rate, which in no event shall be less than 5.50%, plus .25% with respectto cash advances and a rate of such prime rate plus 2.0% with respect toequipment advances. We are obligated to pay an annual facility fee of $5,000(0.50% of the gross facility amount). We must maintain certain financialrequirements, including net profit after tax, on a quarterly basis, of at least$0.01, and a debt service coverage ratio with respect to equipment advances. Wewere in compliance with these requirements at December 31, 2005; however, thereis no assurance that we will be in compliance at future dates. This agreementterminates on July 27, 2006 or upon a date that the bank chooses to terminatethe agreement. Any unpaid balance is due and payable pursuant to the agreementon the termination date. If the agreement is terminated within the first 12months following its execution on July 27, 2005, we will be required to pay anearly termination fee of 1.0% of the credit facility amount under the terms ofthe agreement. At December 31, 2005 we had an outstanding balance of $60,000under this agreement and our remaining borrowing capacity was approximately$558,000 available under the accounts receivable agreement. Under the equipmentfinancing agreement, we had an outstanding balance of $254,000 at December 31,2005, all of which shall be repaid in thirty-six (36) equal monthlyinstallments of principal, plus all accrued finance charges, beginning onDecember 31, 2005. On December 23, 2005 we signed a Business FinancingModification Agreement with Bridge Bank for a second line of credit forequipment advances. Effective January 1, 2006, through June 30, 2006, we mayrequest equipment advances up to an aggregate principal amount of $750,000,with a remaining borrowing capacity of approximately $746,000 available as ofDecember 31, 2005.

 

At December 31, 2005, we had $1.7 million in cashand cash equivalents. For the nine months ended December 31, 2005, ouroperating activities provided cash of approximately $1.2 million, as comparedto operating activities providing cash of $412,000 for the nine months endedDecember 31, 2004. Net cash used in investing activities amounted to $1.3million for the nine months ended December 31, 2005, as compared to $780,000 ofnet cash provided by investing activities during the nine months ended December31, 2004. Of the $1.3 million used in investing activities for the periodending December 31, 2005, $505,000 was expenditures for capital equipment toexpand our production capabilities and for use in research and development and$755,000 was used for long-term investments. From the $780,000 of cash providedby investing activities for the nine month period ended December 31 2004, $1.1million in cash was received in connection with the MPI acquisition, offset by$404,000 in expenditures for capital equipment. Net cash provided by financingactivities was $217,000 for the nine months ended December 31, 2005, $234,000of the proceeds was from our line of credit, and $35,000 of the proceeds wasfrom exercised stock options, offset by $52,000 used to pay down capital leaseobligations. For the nine months ended December 31, 2004, $431,000 was used infinancing activities, of which $107,000 was a direct result of paying down ourlease obligations, and $338,000 was used to pay off our notes payable for ourinvestors and related parties, offset by $5,000 in proceeds from our line ofcredit, and $9,000 in proceeds from the exercise of warrants.

 

We anticipate capital expenditures of approximately $702,000 in fiscal2006. We believe that funds will be provided by our operating activities.However, we may choose to finance some of these expenditures through ourfinancing agreement with Bridge Bank. At December 31, 2005, we had a line ofcredit agreement with Bridge Bank, of which $1,000,000 may be used forequipment advances. We are obligated to pay the bank a finance charge at a rateper year equal to the prime rate, which in no event shall be less than 5.50%,plus 2.0% with respect to equipment advances. Under the equipment financingagreement, we had an outstanding balance of $254,000 at December 31, 2005,

 

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all of which shall be repaid inthirty-six (36) equal monthly installments of principal, plus all accruedfinance charges, beginning on December 31, 2005. On December 23, 2005 we signeda Business Financing Modification Agreement with Bridge Bank for a second lineof credit for equipment advances. Effective January 1, 2006, through June 30,2006, we may request equipment advances up to an aggregate principal amount of$750,000, with a remaining borrowing capacity of approximately $746,000available as of December 31, 2005.

 

In addition to the funds raised in July 2003, we may attempt to procureadditional sources of financing in the event that the capital available as ofDecember 31, 2005 is insufficient for our operating needs and capitalexpenditures. These sources may include, but are not limited to, additionalsales of our securities. There are, however, no assurances that we will be ableto successfully obtain additional financing at terms acceptable to us. Failureto obtain such financing could have a material adverse effect on our ability tooperate as a going concern.

** **

Successfulcompletion of our development program and attaining profitable operations aredependent upon our maintaining a level of sales adequate to support our coststructure. In addition, realization of a major portion of the assets in theaccompanying balance sheet is dependent upon our ability to meet our financingrequirements and the success of our plans to sell our products. The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or amounts and classifications ofliabilities that might be necessary should we be unable to continue inexistence.

 

**CriticalAccounting Policies**

** **

Our discussion and analysis of our financialconditions and results of operations are based upon our financial statements,which have been prepared in accordance with generally accepted accountingprinciples in the United States. The preparation of financial statementsrequires managers to make estimates and disclosures on the date of thefinancial statements. On an on-going basis, we evaluate our estimates,including, but not limited to, those related to revenue recognition. We useauthoritative pronouncements, historical experience, and other assumptions asthe basis for making judgments. Actual results could differ from thoseestimates. We believe that the following critical accounting policies affectour more significant judgments and estimates in the preparation of ourfinancial statements.

 

*Revenue recognition.* We generate our revenue through the sale ofproducts. Our policy is to recognize revenue when the applicable revenuerecognition criteria have been met, which generally include the following:

 

•                  *Persuasive evidence of an arrangement exists;*

•                  *Delivery has occurred or services have been rendered;*

•                  *Price is fixed or determinable; and*

•                  *Collectibility is reasonablyassured*

 

Revenue fromthe sale of products is generally recognized after both the goods are shippedto the customer and acceptance has been received, if required. Our products arecustom made for our customers, who primarily consist of original engineermanufacturers (OEMs), and we do not accept returns. Our products are shippedcomplete and ready to be incorporated into higher level assemblies by ourcustomers. The terms of the customer arrangements generally pass title and riskof ownership to the customer at the time of shipment.

 

Recording revenue from the sale of productsinvolves the use of estimates and management judgment. We must make adetermination at the time of sale whether the customer has the ability to makepayments in accordance with arrangements. While we do utilize past paymenthistory, and, to the extent available for new customers, public creditinformation in making our assessment, the determination of whethercollectibility is reasonably assured is ultimately a judgment decision thatmust be made by management.

 

*Allowance for 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) theaging of the accounts receivable balance; (ii) the customer’s past paymentexperience; or (iii) a deterioration in the customer’s financial condition,evidenced by weak financial condition and/or continued poor operating results,reduced credit ratings, and/or a bankruptcy filing. In addition to the specificallowance, we maintain a general allowance for all its accounts receivableswhich are not covered by a specific allowance. The general allowance is

 

16

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establishedbased on such factors, among others, as: (i) the total balance of theoutstanding accounts receivable, including considerations of the agingcategories of those accounts receivable; (ii) past history of uncollectibleaccounts receivable write-offs; and (iii) the overall creditworthiness of thecustomer base. A considerable amount of judgment is required in assessing therealizability of accounts receivables. Should any of the factors considered indetermining the adequacy of the overall allowance change, an adjustment to theprovision for doubtful accounts receivable may be necessary.

 

*Inventory.* Inventoriesare stated at the lower of cost or market, cost being determined on thefirst-in, first-out method. Inventories are written down if the estimated netrealizable value is less than the recorded value. We review the carrying costof our inventories by product each quarter to determine the adequacy of ourreserves for obsolescence. In accounting for inventories we must make estimatesregarding the estimated net realizable value of our inventory. This estimate isbased, in part, on our forecasts of future sales and age of the inventory.

 

*IntangibleAssets*. We test intangible assets with indefinitelives for impairment on an annual basis or more frequently if certain eventsoccur. If the assets are considered to be impaired, the impairment to berecognized will be measured by the amount in which the carrying amount exceedsthe fair value of the assets. For our intangible assets with finite lives,including our customer lists, existing technology, and patents, we amortize thecosts of the assets over their useful lives and assess impairment at leastannually or whenever events and circumstances suggest the carrying value of anasset may not be recoverable. Determining the life of the assets with finitelives is judgmental in nature and involves the use of estimates andassumptions. These estimates and assumptions involve a variety of factors,including future market growth and conditions, forecasted revenues and costsand a strategic review of our business and operations. We base our fair valueestimates on assumptions we believe to be reasonable but that are unpredictableand inherently uncertain. Actual future results may differ from those estimates.In the event we determine that an intangible asset is impaired in the future,an adjustment to the value of the asset would be charged to earnings in theperiod such determination is made.

 

*ExistingTechnology.*Our existing technology is based on a patentissued in 1990, which continues to be the main technology of MPI. It is asubstrate deposition technology that is mature and with no replacementtechnology forecasted.

 

**Additional Factors That May Affect Future Results**

 

Future operating results may be impacted by anumber of factors that could cause actual results to differ materially fromthose stated herein, which reflect management’s current expectations. Thesefactors include:

 

•                                          industry-specific factors (including the relianceupon growth of the defense microwave market, significant competitioncharacterized by rapid technological change, new product development, productobsolescence, and significant price erosion over the life of a product);

 

•                                          our ability to timely develop and producecommercially viable products at competitive prices;

 

•                                          our ability to produce products which meet thequality standards of both existing and potential new customers;

 

•                                          our ability to accurately anticipate customerdemand;

 

•                                          our ability to manage expense levels, in light ofvarying revenue streams;

 

•                                          the availability and cost of components;

 

•                                         the impact of worldwide economic and politicalconditions on our business; and

 

•                                         theability to integrate potential futureacquisitions into our existing operations.

 

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We believe that, to the extent that foreignsales are recognized, we may face increased risk associated with political andeconomic instability, compliance with foreign regulatory rules governing exportrequirements, tariffs and other trade barriers, differences in intellectualproperty protections, longer accounts receivable cycles, currency fluctuations,and general trade restrictions. If any of these risks materialize, they couldhave a material adverse effect on our business, results of operations, andfinancial condition.

 

We haveevaluated the credit exposure associated with conducting business with foreigncustomers and have concluded that such risk is acceptable. Nevertheless, anysignificant change in the economy or a deterioration in United States traderelations or the economic or political stability of foreign markets could havea material adverse effect on our business, results of operations, and financialcondition.

 

Sales toforeign 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.

 

We experiencesignificant price competition and expect price competition in the sale of ourproducts to remain intense. We cannot assure you that our competitors will notdevelop new technologies or enhancements to existing products or introduce newproducts that will offer superior price or performance features. We expect ourcompetitors to offer new and existing products at prices necessary to gain orretain market share. Several of our competitors have substantial financialresources, which may enable them to withstand sustained price competition or adownturn in the pricing of their products in the future. Substantially all ofour competitors have, and potential future competitors could have,substantially greater technical, marketing, distribution, and other resourcesthan we do and have, or could have, greater name recognition and marketacceptance of their products and technologies.

 

The markets inwhich we compete are characterized by rapidly changing technology and continuousimprovements in products and services. Our future success depends on ourability 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 compete effectively on the basisof price, performance and quality, that adequately address OEM customer andend-user customer requirements, and that achieve market acceptance. We believethat to remain competitive in the future we will need to continue to developnew products, which will require the investment of significant financialresources in new product development. In the event our newly developed productsare not timely developed or do not gain market acceptance, our business,results of operations and financial condition could be materially adverselyaffected.

 

Our quarterlyand annual results have in the past been, and will continue to be, subject tosignificant fluctuations due to a number of factors, any of which could have amaterial adverse effect on our business, financial condition and results ofoperations. There can be no assurance that we will not experience suchfluctuations in the future. We establish our expenditure levels for productdevelopment and other operating expenses based on expected revenues, andexpenses 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 and Procedures**

 

(a)          *Evaluation of disclosure controlsand procedures*. As of the end ofthe period covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Director of Finance, of the effectiveness of the designand operation of our disclosure controls and procedures, as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.

 

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Based upon that evaluation, our ChiefExecutive Officer and Director of Finance concluded that our disclosurecontrols and procedures were effective as of the end of the applicable periodto ensure that the information required to be disclosed by the Company inreports that it files or submits under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and (ii) is accumulated andcommunicated to our management, including our Chief Executive Officer andDirector of Finance, as appropriate to allow timely decisions regardingrequired disclosures.

 

(b)         *Changes in internal controls overfinancial reporting*. There was nochange in our internal control over financial reporting during our most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

#### **PART II – OTHER INFORMATION**

** **

**Item 1. LegalProceedings**

** **

**Not Applicable**

** **

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

** **

Not Applicable

 

**Item 3. Defaults UponSenior Securities**

** **

**Not Applicable**

** **

**Item 4. Submission of Matters to aVote of Security Holders**

 

Not Applicable

 

**Item 5. Other Information**

** **

**On December 23, 2005 we signed a Business FinancingModification Agreement with Bridge Bank for a second line of credit forequipment advances. Effective January 1, 2006, through June 30, 2006, we mayrequest equipment advances up to an aggregate principal amount of $750,000,with a remaining borrowing capacity of approximately $746,000 available as ofDecember 31, 2005. A copy of the Business Financing Modification Agreement isfiled as Exhibits 10.21 and 10.22 hereto and incorporated herein in its entirely.**

** **

**On February 3, 2006 the company purchased the buildinglocated at 3350 Scott Blvd. Bldg:25 in Santa Clara, California for a purchaseprice of $800,000.00. The building is being financed by the Bank of America inthe form of a promissory note in the amount of $640,000.00 and the Company topay this loan in 83 regular payments of $4,425.88 each and one irregular lastpayment estimated at $556,594.48. The company's final payment is due February10, 2013 and will be for all principle and interest not yet paid. Paymentsinclude principle and interest. A copy of the loan agreement is filed hereto asExhibit 10.23 and incorporated herein in its entirety.**

** **

**Item 6. Exhibits**

 

 

The exhibits listed in the Exhibit Index arefiled as part of this report.

 

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#### **SIGNATURES**

 

In accordance with Section 13 or 15(d)of the Exchange Act, the registrant caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | AML Communications Inc. |                             |   |
|--------|-------------------------|----------------------------------|--------|
|   |                    |                             |   |
|   |  /s/: Jacob Inbar  |                             |   |   |
|   | By:                     | Jacob Inbar, President and  |   |   |
|   |                    | Chief Executive Officer          |   | Dated: February 14, 2006 |
|        |                         |                                  |        |  |  |

 

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EXHIBIT INDEX

 
|        |   |
|-------------|--------|
| 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       |   | Fifth Amended and Restated 1995 Stock Option Agreement at July 12,  2005 (13) |
| 10.13       |   | Parr-Bohn Properties First Amendment to lease of 1000 Avenida Acaso,  Camarillo, CA. (8) |
| 10.14       |   | Interim Lease and Proposed Lease Terms (9) |
| 10.15       |   | Financing Agreement dated July 8, 2004 with Bridge Bank (10) |
|  10.16 | *      | Enterprise Agreement Number 4627 dated August 26, 2004 (11) |
| 10.17       |   | Business Financing Modification Agreement with Bridge Bank, dated  July 27, 2005(12) |
| 10.18       |   | Commercial Lease between the Company and Microwave Holdings, LLC  dated August 1, 2005(12) |
| 10.19       | *      | Purchase Order from Raytheon  Space and Airborne Systems dated September 5, 2004, as amended (12) |
| 10.20       |   | Fifth Amended and Restated 1995 Stock Incentive Plan as Amended and  Restated on July 12, 2005 (13) |
| 10.21       |   | Business Financing Modification Agreement with Bridge Bank, dated  December 23, 2005 (14) |
| 10.22       |   | Business Financing Modification Agreement with Bridge Bank, dated  January 19, 2006 (14) |
| 10.23       |   | Loan Agreement with B of A for MPI Building (14) |
| 31.1        |   | Certification by the Chief Executive Officer (14) |
| 31.2        |   | Certification by the Chief Financial Officer (14) |
| 32.1        |   | Certification  pursuant to Section 906 of the Sarbanes Oxley Act (14) |
| 32.2        |   | Certification  pursuant to Section 906 of the Sarbanes Oxley Act (14) |

 

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(1)                                  Previously filed with the Securities and ExchangeCommission as Exhibit 10.13 to the Company’s Form 10KSB for the fiscal yearended March 31, 2004.

 

(2)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Registration Statement on Form SB-2 No. 33-99102-LAand incorporated herein by reference.

 

(3)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-KSB for fiscal year endedMarch 31, 1996 and incorporated herein by reference

 

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(4)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-QSB for the quarter endedDecember 31, 1999 and incorporated herein by reference.

 

(5)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-QSB for the quarter endedDecember 31, 2000 and incorporated herein by reference.

(6)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-QSB for the quarter endedDecember 31, 2001 and incorporated herein by reference.

 

(7)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-QSB for the quarter endedDecember 31, 2002 and incorporated herein by reference.

 

(8)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-KSB for the fiscal year endedMarch 31, 2004 and incorporated herein by reference.

 

(9)                                  Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 8-K dated July 6, 2004 andincorporated herein by reference.

 

(10)                            Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-QSB for the quarter endedJune 30, 2004 and incorporated herein by reference.

 

(11)                            Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 8-K dated September 1, 2004 andincorporated herein by reference.

 

(12)                            Previously filed with the Securities and ExchangeCommission as an exhibit to the Company’s Form 10-QSB for the quarter endedJune 30, 2005 and incorporated herein by reference.

 

(13)                            Previously filed with the Securities and ExchangeCommission as an attachment to the Company’s Definitive Proxy Statement datedJuly 29, 2005 and incorporated herein by reference.

 

(14)                            Filed herewith.

 

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*  Confidential treatment requested as to certainportions, which portions were omitted and filed separately with the Securitiesand Exchange Commission.

 

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