**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-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, 2003**                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                               |
| **or**                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                              |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                               |
| **For the transition period  from                                 to                                ** |
|                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Commission File Number:        0-27252**                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                    |        |                                                                                                     |  |  |

 

**AML COMMUNICATIONS, INC.**

(Exactname of small business issuer as specified in its charter)

 

| **Delaware**                                                     |   | **77-0130894**                      |
|------------------------------------------------------------------|--------|-------------------------------------|
| (State  or Other jurisdiction of  incorporation or organization) |   | (IRS  Employer  Identification No.) |
|                                                             |   |                                |
| **1000  Avenida Acaso  Camarillo, California**                   |   | **93012**                           |
| (Address  of principal executive offices)                        |   | (Zip  Code)                         |
|                                                             |   |                                |
| **(805)  388-1345**                                              |
| (Issuer’s  telephone number including area code)            |

 

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

 
| Yes ý   No o |
|--------------------------------------------|

 

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

 

Common Stock Outstanding as ofJanuary 31, 2004:  7,837,584  shares

 

Transitional Small BusinessDisclosure Format: Yes o  No ý

 

 

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**AML COMMUNICATIONS, INC.**

 

**INDEX TO FORM 10QSB**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                     |   |
|-------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                                          |   |
| Item 1.     | Financial Statements                                                                                                          |   |
|        |                                                                                                                          |   |
|        | Balance Sheets at  December 31, 2003 and March 31, 2003                                                             |   |
|        |                                                                                                                          |   |
|        | Statements of Operations for  the three-month and nine month periods ended  December 31, 2003 and December 31, 2002 |   |
|        |                                                                                                                          |   |
|        | Statements of Cash Flows for  the nine month periods ended  December 31, 2003 and December 31, 2002                 |   |
|        |                                                                                                                          |   |
|        | Notes to Interim  Financial Statements                                                                                        |   |
|        |                                                                                                                          |   |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   |   |
|        |                                                                                                                          |   |
| Item 3.     | Controls and Procedures                                                                                                       |   |
|        |                                                                                                                          |   |
| **PART II** | **OTHER INFORMATION**                                                                                                         |   |
|        |                                                                                                                          |   |
| Item 1.     | Legal  Proceedings                                                                                                            |   |
|        |                                                                                                                          |   |
| Item  2.    | Changes  in 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 and  Reports on Form 8-K                                                                                             |   |
|        |                                                                                                                          |   |
|        | **SIGNATURES**                                                                                                                |   |

 

2

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**PARTI - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**AMLCOMMUNICATIONS, INC.****CONDENSEDBALANCE SHEET**

 
|                                                                                                                                                      |   | **December 31,  2003** |       | **March 31,  2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|--------------------------|------------|
|                                                                                                                                                      |   |                        | ** ** |                     | ** ** |
| **ASSETS**                                                                                                                                                |   |                        | ** ** |                     | ** ** |
| Current Assets:                                                                                                                                           |   |                        |       |                     |       |
| Cash and cash equivalents                                                                                                                                 |   | $                           | 1,432,000  |                     | $          | 195,000 |   |
| Accounts receivable, net of allowance for doubtful accounts of $34,000  at December 31, 2003 and $36,000 March 31, 2003                         |   | 922,000                     |       | 609,000                  |       |
| Inventories, net                                                                                                                                          |   | 922,000                     |       | 1,059,000                |       |
| Other current assets                                                                                                                                      |   | 156,000                     |       | 135,000                  |       |
| Total current assets                                                                                                                                      |   | 3,432,000                   |       | 1,998,000                |       |
|                                                                                                                                                      |   |                        |       |                     |       |
| Property and Equipment, at cost:                                                                                                                          |   | 3,664,000                   |       | 4,267,000                |       |
| Less - Accumulated depreciation and amortization                                                                                                          |   | (3,214,000                  | )          | (3,631,000               | )          |
|                                                                                                                                                      |   | 450,000                     |       | 636,000                  |       |
|                                                                                                                                                      |   |                        |       |                     |       |
| Other Assets                                                                                                                                              |   | 43,000                      |       | 43,000                   |       |
|                                                                                                                                                      |   | $                           | 3,925,000  |                     | $          | 2,677,000 |   |
|                                                                                                                                                      |   |                        |       |                     |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                            |   |                        |       |                     |       |
|                                                                                                                                                      |   |                        |       |                     |       |
| Current Liabilities:                                                                                                                                      |   |                        |       |                     |       |
| Accounts payable                                                                                                                                          |   | $                           | 587,000    |                     | $          | 568,000 |   |
| Line of credit                                                                                                                                            |   | 684,000                     |       | 482,000                  |       |
| Current portion of capital lease obligations                                                                                                              |   | 117,000                     |       | 168,000                  |       |
| Accrued expenses:                                                                                                                                         |   |                        |       |                     |       |
| Accrued payroll and payroll related expenses                                                                                                              |   | 136,000                     |       | 160,000                  |       |
| Accrued state income taxes                                                                                                                                |   | 88,000                      |       | —                   |       |
| Other accrued liabilities                                                                                                                                 |   | 43,000                      |       | 243,000                  |       |
| Total current liabilities                                                                                                                                 |   | 1,655,000                   |       | 1,621,000                |       |
|                                                                                                                                                      |   |                        |       |                     |       |
| Notes payable – officers                                                                                                                             |   | 295,000                     |       | 50,000                   |       |
| Notes payable - investors                                                                                                                                 |   | 43,000                      |       | —                   |       |
| Capital Lease Obligations, net of current portion                                                                                                         |   | 106,000                     |       | 126,000                  |       |
| Total liabilities                                                                                                                                         |   | 2,099,000                   |       | 1,797,000                |       |
|                                                                                                                                                      |   |                        |       |                     |       |
| Stockholders’ Equity:                                                                                                                                |   |                        |       |                     |       |
| Preferred stock, $.01 par value:                                                                                                                          |   |                        |       |                     |       |
| 1,000,000 shares authorized; no shares issued or outstanding                                                                                              |   | —                      |       | —                   |       |
| Common stock, $.01 par value:                                                                                                                             |   |                        |       |                     |       |
| 15,000,000 shares authorized; 7,837,584 shares issued and outstanding  at December 31, 2003 and 7,829,459 shares outstanding at March 31,  2003 |   | 73,000                      |       | 73,000                   |       |
|                                                                                                                                                      |   |                        |       |                     |       |
| Capital in excess of par value                                                                                                                            |   | 10,338,000                  |       | 10,301,000               |       |
| Accumulated deficit                                                                                                                                       |   | (8,585,000                  | )          | (9,494,000               | )          |
| Total stockholders’ equity                                                                                                                           |   | 1,826,000                   |       | 880,000                  |       |
|                                                                                                                                                      |   | $                           | 3,925,000  |                     | $          | 2,677,000 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

3

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**AMLCOMMUNICATIONS, INC.****STATEMENTSOF OPERATIONS**

 
|                                                                   |   | **Three Months Ended**    |      | **Nine Months Ended**     |       |
|------------------------------------------------------------------------|--------|---------------------------|-----------|---------------------------|------------|
|                                                                   |   | **December 31,2003** |      | **December 31,2002** |       | **December 31,2003** |   | **December 31,2002** |   |
|                                                                   |   |                      |      |                      | ** ** |   | ** ** |   |   |
| Net sales                                                              |   | $                         | 2,003,000 |                      | $          | 1,266,000 |   | $ | 5,280,000 |   | $ | 3,638,000 |   |
| Cost of goods sold                                                     |   | 1,047,000                 |      | 857,000                   |       | 2,683,000 |   | 2,252,000 |   |
| Gross profit                                                           |   | 956  ,000                 |      | 409,000                   |       | 2,597,000 |   | 1,386,000 |   |
|                                                                   |   |                      |      |                      |       |   |   |   |   |
| Operating expenses:                                                    |   |                      |      |                      |       |   |   |   |   |
| Selling, general & administrative                                  |   | 349,000                   |      | 287,000                   |       | 993,000 |   | 928,000 |   |
| Research and development                                               |   | 177,000                   |      | 313,000                   |       | 550,000 |   | 949,000 |   |
|                                                                   |   | 526,000                   |      | 600,000                   |       | 1,543,000 |   | 1,877,000 |   |
| Profit (loss) from operations                                          |   | 430,000                   |      | (191,000                  | )          | 1,054,000 |   | (491,000 | ) |
|                                                                   |   |                      |      |                      |       |   |   |   |   |
| Other income (expense), net                                            |   | (40,000                   | )         | (9,000                    | )          | (56,000 | ) | (203,000 | ) |
| Profit (loss) before provision for income taxes                        |   | 390,000                   |      | (200,000                  | )          | 998,000 |   | (694,000 | ) |
|                                                                   |   |                      |      |                      |       |   |   |   |   |
| Provision for income taxes                                             |   | 34,000                    |      | —                    |       | 88,000 |   | — |   |
|                                                                   |   |                      |      |                      |       |   |   |   |   |
| Net profit  (loss)                                                |   | $                         | 356,000   |                      | $          | (200,000 | ) | $ | 910,000 |   | $ | (694,000 | ) |
|                                                                   |   |                      |      |                      |       |   |   |   |   |
| Basic earnings (loss) per common share                                 |   | $                         | 0.05      |                      | $          | (0.03 | ) | $ | 0.12 |   | $ | (0.09 | ) |
|                                                                   |   |                      |      |                      |       |   |   |   |   |   |   |   |   |
| Basic weighted average number of shares of common stock outstanding    |   | 7,838,000                 |      | 7,829,000                 |       | 7,833,000 |   | 7,829,000 |   |
|                                                                   |   |                      |      |                      |       |   |   |   |   |
| Diluted earnings (loss) per  common share                              |   | $                         | 0.04      |                      | $          | (0.03 | ) | $ | 0.09 |   | $ | (0.09 | ) |
| Diluted weighted average number  of shares of common stock outstanding |   | 9,616,000                 |      | 7,829,000                 |       | 9,611,000 |   | 7,829,000 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

4

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**AMLCOMMUNICATIONS, INC.****STATEMENTSOF CASH FLOWS**

 
|                                                                                  |   | Nine Months Ended           |       |
|---------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                  |   | **December 31,  2003** |       | **December 31,  2002** |   |
|                                                                                  |   |                        | ** ** |   | ** ** |
| Cash Flows from Operating Activities:                                                 |   |                        |       |   |   |
| Net Profit (loss)                                                                     |   | $                           | 910,000    |   | $ | (694,000 | ) |
| Adjustments to reconcile net profit (loss) to net cash used in  operating activities: |   |                        |       |   |   |
| Interest on debt discount fees                                                        |   | 9,000                       |       | — |   |
| Depreciation and amortization                                                         |   | 204,000                     |       | 433,000  |   |
| Bad debt expense                                                                      |   | (2,000                      | )          | — |   |
| Loss (gain) on sale of fixed assets                                                   |   | (48,000                     | )          | — |   |
| Changes in assets and liabilities:                                                    |   |                        |       |   |   |
| Decrease (increase) in:                                                               |   |                        |       |   |   |
| Accounts receivable                                                                   |   | (311,000                    | )          | 750,000 |   |
| Inventories                                                                           |   | 137,000                     |       | 137,000 |   |
| Other current assets                                                                  |   | (20,000                     | )          | 29,000 |   |
| Other assets                                                                          |   | —                      |       | (10,000 | ) |
| Increase (decrease) in:                                                               |   |                        |       |   |   |
| Accounts payable                                                                      |   | 17,000                      |       | (434,000 | ) |
| Accrued state income taxes                                                            |   | 88,000                      |       | — |   |
| Accrued expenses                                                                      |   | (198,000                    | )          | (21,000 | ) |
| Net cash from operating activities                                                    |   | 786,000                     |       | 190,000 |   |
|                                                                                  |   |                        |       |   |   |
| Cash Flows from Investing Activities:                                                 |   |                        |       |   |   |
| Purchases of property and equipment                                                   |   | (18,000                     | )          | (20,000 | ) |
| Proceeds from the sale of property and equipment                                      |   | 48,000                      |       | 24,000 |   |
| Net cash provided by investing activities                                             |   | 30,000                      |       | 4,000 |   |
|                                                                                  |   |                        |       |   |   |
| Cash Flows from Financing Activities:                                                 |   |                        |       |   |   |
| Exercise of stock options                                                             |   | 2,000                       |       | — |   |
| Proceeds from line of credit, net                                                     |   | 202,000                     |       | 77,000 |   |
| Proceeds from notes payable – related parties                                    |   | 245,000                     |       | — |   |
| Proceeds from notes payable - investors                                               |   | 43,000                      |       | — |   |
| Principal payments on capital lease obligations, net                                  |   | (71,000                     | )          | (112,000 | ) |
| Net cash provided by (used in) financing activities                                   |   | 421,000                     |       | (35,000 | ) |
|                                                                                  |   |                        |       |   |   |
| Net Increase in Cash and Cash Equivalents                                             |   | 1,237,000                   |       | 159,000 |   |
| Cash and Cash Equivalents, beginning of period                                        |   | 195,000                     |       | 160,000 |   |
| Cash and Cash Equivalents, end of period                                              |   | $                           | 1,432,000  |   | $ | 319,000 |   |
|                                                                                  |   |                        |       |   |   |
| Supplemental disclosures of cash flow information:                                    |   |                        |       |   |   |
| Cash paid during the period for:                                                      |   |                        |       |   |   |
| Interest                                                                              |   | $                           | 104,000    |   | $ | 57,000 |   |
|                                                                                  |   |                        |       |   |   |
| Non-cash transactions:                                                                |   |                        |       |   |   |
| Debt incurred to purchased property and equipment                                     |   | $                           | —     |   | $ | 100,000 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

5

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**AMLCOMMUNICATIONS, INC.****NOTESTO FINANCIAL STATEMENTS****DECEMBER 31, 2003**

**1.****             Basisof Presentation**

 

AMLCommunications, Inc. (the “Company”) is a designer, manufacturer, and marketerof amplifiers and related products that address the defense microwave markets.

 

The accompanying unaudited financial statements havebeen prepared in conformity with accounting principles generally accepted inthe United States.  However, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been omitted or condensed pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, alladjustments (consisting of normal recurring adjustments) necessary for a fairpresentation have been included.  Theresults of operations and cash flows for the three-month period presented arenot necessarily indicative of the results of operations for a full year.  These financial statements should be read inconjunction with the Company’s March 31, 2003 audited financial statementsand notes thereto included in the Company’s Annual Report on Form 10-KSB.

 

Going Concern Issues

 

In connectionwith the audit for the year ended March 31, 2003, we received a reportfrom our independent certified public accountants that includes an explanatoryparagraph describing uncertainty in our ability to continue as a goingconcern.  Our financial statementsincluded herein contemplate our ability to continue and as such do not includeany adjustments that might result from this uncertainty. These financialstatements should be read in conjunction with the Company’s March 31, 2003audited financial statements and notes thereto included in the Company’s AnnualReport on Form 10-KSB.

 

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

 

Basic earningsper share is computed by dividing net income or loss by the weighted averagenumber of shares outstanding for the year. “Diluted” earnings per share is computed by dividing net income or lossby the total of the weighted average number of shares outstanding, and the dilutiveeffect of outstanding stock options (applying the treasury stock method).

 

**3.**             **Inventories**

 

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

 
|            |   | **December 31, 2003** |       | **March 31, 2003** |       |
|-----------------|--------|----------------------------|------------|-------------------------|------------|
|            |   |                       | ** ** |                    | ** ** |
| Raw materials   |   | $                          | 708,000    |                    | $          | 800,000 |   |
| Work-in-process |   | 62,000                     |       | 132,000                 |       |
| Finished goods  |   | 152,000                    |       | 127,000                 |       |
|            |   | $                          | 922,000    |                    | $          | 1,059,000 |   |

 

6

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**4.****             Line of Credit**

 

InSeptember 2003, we renewed our line of credit with Silicon Valley Bank. Inaddition, we increased our line of credit from $1,000,000 to $2,000,000.  This revolving line of credit bears interestat the bank’s reference rate at prime plus 1%, totaling 5.00% atDecember 31, 2003.  This line ofcredit is secured by substantially all of the Company’s assets and expires onNovember 20, 2004. As of December 31, 2003, there was $684,000 inoutstanding borrowings under the line of credit. Borrowing under the line ofcredit is subject to a borrowing base of accounts receivable, and there are nofinancial covenants.

 

**5.****             Stock Based Compensation**

 

InDecember 2002, the FASB issued Statement of Financial Accounting StandardsNo. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition andDisclosure”. This Statement amends SFAS 123, “Accounting for Stock-BasedCompensation”, to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. In addition, SFAS 148 amends the disclosure requirements ofStatement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. Thetransition guidance and annual disclosure provisions of SFAS 148 are effectivefor fiscal years ending after December 15, 2002, with earlier applicationpermitted in certain circumstances. The interim disclosure provisions are effectivefor financial reports containing financial statements for interim periodsbeginning after December 15, 2002. We are currently evaluating whichmethod of transition to fair value accounting we will elect.

 

The followingtable presents pro forma disclosures required by SFAS No. 148 of net income(loss) and basic and diluted earnings (loss) per share as if stock-basedemployee compensation had been recognized during the nine months endedDecember 31, 2003. The compensation expense for these periods has been determinedunder the fair value method using the Black-Scholes pricing model, and assumesgraded vesting.

 
|                                                                |   | **For the nine monthsended December 31,  2003** |   | **For the nine monthsended December 31,  2002** |   |
|---------------------------------------------------------------------|--------|------------------------------------------------------|--------|------------------------------------------------------|--------|
| Net income (loss) as reported                                       |   | 910,000                                              |   | (694,000                                             | )      |
| Less: stock-based compensation  expense, net of related tax effects |   | (221,000                                             | )      | (182,000                                             | )      |
| Pro forma net loss                                                  |   | 689,000                                              |   | (876,000                                             | )      |
|                                                                |   |                                                 |   |                                                 |   |
| Basic earnings per share - as  reported                             |   | 0.12                                                 |   | (0.09                                                | )      |
| Diluted earnings per share - as  reported                           |   | 0.09                                                 |   | (0.09                                                | )      |
| Basic earnings per share - pro  forma                               |   | 0.09                                                 |   | (0.11                                                | )      |
| Diluted earnings per share - pro  forma                             |   | 0.07                                                 |   | (0.10                                                | )      |

 

**6.****             Recently Issued Accounting Pronouncements**

 

InApril 2003, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard (SFAS) No. 149, Amendment of Statement 133on Derivative Instruments and Hedging Activities. The Statement furtherclarifies accounting for derivative instruments. The Company believes theadoption of this Statement will have no material impact on its financialstatements.

 

InMay 2003, the FASB issued Statement of Financial Accounting StandardsNo. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity,” (“SFAS 150”).SFAS 150 establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). Many ofthose instruments were previously classified as equity. SFAS 150 iseffective for financial

 

7

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instrumentsentered into or modified after May 31, 2003, and otherwise is effective atthe beginning of the first interim period beginning after June 15, 2003.We do not believe the adoption of SFAS 150 will have a material impact onour consolidated financial statements.

 

**7.****             Listing History**

 

Our common stockcurrently trades on Nasdaq’s OTC Bulletin Board under the symbol “AMLJ.OB”. Ourcommon stock traded on the Nasdaq Small Cap Market from October 8, 2001 toAugust 13, 2002 and on the Nasdaq National Market prior to that time.  We were de-listed from NASDAQ because of ourfailure to meet the $1.00 minimum bid price requirement.

 

**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

This filingcontains forward-looking statements which involve risks and uncertainties.  The Company’s actual future results maydiffer materially from the results discussed in the forward-lookingstatements.  When used in this report,the words “expects” “anticipates” and “estimates” and similar expressions areintended to identify forward-looking statements. Factors that could cause actualresults to differ materially from those expressed in any forward-lookingstatement made by the Company include, but are not limited to:

 

•      our ability tofinance our activities and maintain our financial liquidity;

•      our ability toattract and retain qualified, knowledgeable employees;

•      the impact of generaleconomic conditions on our business;

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

•      the limited number ofpotential customers for our products;

•      the variability ingross margins on our products;

•      our ability todesign  and market new productssuccessfully;

•      our failure toacquire new customers in the future;

•      deterioration ofbusiness and economic conditions in our markets;

•      intensely competitiveindustry conditions with increasing price competition; and

•      the rate of growth inthe defense markets.

 

Please read thefactors set forth in the section below titled “Additional Factors That MayAffect Future Results” and other risk factors detailed in the Company’s filingswith the Securities and Exchange Commission (the “SEC”).  The Company undertakes no obligation topublicly release any revisions to these forward-looking statements to reflectevents or circumstances after the date this report is filed with the SEC or toreflect the occurrence of unanticipated events**.**

 

**Overview**

 

The Company,which is based in southern California, designs, manufactures and markets RadioFrequency (“RF”) and Microwave power and low noise amplifiers for a variety offrequency ranges and transmission protocols serving the defense microwave andwireless communications markets. The Company’s defense industry products, whichrepresents approximately 90% of its sales, are used in communications and radarequipment integrated into electronic systems for tactical aircraft, ships,ground systems, and missile systems. The Company’s wireless products consist ofan array of low noise and power amplifiers serving the wireless, PCS, andtwo-way messaging market, as well as Cellular Coverage Enhancementamplifiers.  These products,representing approximately 10% of the Company’s sales, are sold to cellularoperators and to original equipment manufactures. The demand for productsmanufactured by the Company and used in the defense industry has been growingat a fast pace during the last 2 years and is expected to continue to grow.This growth is attributable to an increase in demand for the Company’s productsby government prime contractors, as well as to the Company’s strategy toacquire market share by offering leading edge products.  The demand for wireless products has seen arecent increase due to the competition among cellular operators and originalequipment manufactures to provide improved products and services.

 

8

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**Results of Operations**

 

**Three Months EndedDecember 3, 2003 Compared to Three Months Ended December 31, 2002**

 

*Net sales. *Net sales for the three months ended December 31, 2003 were$2.0 million, as compared to net sales of $1.3 million for the three monthsended December 31, 2002, an increase of 58.3%.  The increase in net sales is attributable to the higher volume ofshipments of the defense related MIC products. MIC sales accounted for $1.7 million, or 85.0% of net sales for the threemonths ended December 31, 2003, as compared to $1.1 million, or 83.0% ofnet sales for the three months ended December 31, 2002. Additionally, thecellular and wireless messaging market produced $264,000, or 13.2% of net salesfor the three months ended December 31, 2003, as compared to $216,000, or17.0% of net sales for the three months ended December 31, 2002.

 

*Gross profit. *Gross profit for the three months ended December 31,2003 was $956,000, or 47.7% of net sales, compared to a gross profit of$409,000, or 32.3% of net sales for the three months ended December 31,2002. Gross profit increased as a result of the increase in sales coupled witha reduction in the number of employees, a decrease in occupancy costs and adecrease in depreciation expense for production equipment resulting from thefull depreciation of certain assets.

 

*Selling, general and administrativecosts. *Selling, general, andadministrative costs were $349,000, or 17.4% of net sales, for the three monthsended December 31, 2003, as compared to $287,000, or 22.7% of net sales,for the three months ended December 31, 2002.  The increase in dollar value is attributed to higher professionalfees, increased depreciation expenses due to asset acquisitions for officeequipment, and salary increases for key executive officers. The Companycontinues to benefit from these key executive officers who, are currentlyreceiving below-market salaries.

 

*Research and development costs. *Research and development costs were$177,000, or 8.8% of net sales, for the three months ended December 31,2003, as compared to $313,000, or 24.8% of net sales, for the three monthsended December 31, 2002. These costs declined due to a significantdecrease in depreciation expenses for engineering equipment, resulting from thefull depreciation of certain assets, and a reduction in engineering laborcosts, resulting from a reduction in personnel.

 

*Other expense, net. *Other expense was $40,000 for the threemonths ended December 31, 2003, as compared to other expenses of $9,000for the three months ended December 31, 2002.  The increased expense is attributed to interest and financecharges associated with increased borrowing to facilitate the Company’s growth.

 

*Provision for income taxes.* For thethree months ended December 31, 2003, the Company recorded a provision of$34,000 for state income taxes, due to the suspension by the CaliforniaFranchise Tax Board of the utilization of loss carry forwards.

 

*Net Income. *For the three months ended December 31, 2003, net income was$356,000, as compared to a net loss of $200,000 for the three months endedDecember 31, 2002.

 

**Nine Months EndedDecember 31, 2003 Compared to Nine Months Ended December 31, 2002**

 

*Net sales. *Net sales were $5.3 million for the nine months ended December 31,2003, as compared to net sales of $3.6 million for the nine months endedDecember 31, 2002, an increase of 47.2%. The increase in net sales islargely attributable to the higher volume of shipments of the defense relatedMIC products.  MIC sales accounted for$4.9 million, or 92.6% of net sales for the nine months ended December 31,2003, as compared to $3.2 million, or 87.4% of net sales for the nine monthsended December 31, 2002. The cellular and wireless messaging marketproduced  $392,000, or 7.4% of net salesfor the nine months ended December 31, 2003, as compared to $459,000, or12.6% of net sales for the nine months ended December 31, 2002.

 

*Gross profit. *Gross profit was $2.6 million, or 49.2% of net sales, for thenine months ended December 31, 2003, as compared to $1.4 million, or 38.1%of net sales, for the nine months ended December 31, 2002. Gross profitincreased as a result of the increase in sales coupled with a reduction in thenumber of employees, a decrease in occupancy costs and a decrease indepreciation expense for production equipment resulting from the fulldepreciation of certain assets.

 

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*Selling, general, and administrativecosts. *Selling, general, andadministrative costs were $993,000, or 18.8% of net sales, for the nine monthsended December 31, 2003, as compared to $928,000, or 25.6% of net sales,for the nine months ended December 31, 2002. The increase is attributed tohigher professional fees, increased depreciation expenses due to assetacquisitions for office equipment, and salary increases for key executiveofficers. The Company continues to benefit from these key executive officerswho are currently receiving below-market salaries.

 

*Research and development costs. *Research and development costs were$550,000, or 10.4% of net sales, for the nine months ended December 31,2003, as compared to $949,000, or 26.1% of net sales, for the nine months endedDecember 31, 2002. These costs declined due to a significant decrease indepreciation expense for engineering equipment, resulting from the fulldepreciation of certain assets, and a reduction in engineering labor costs,resulting from a reduction in personnel.

 

*Other expense. *Other expense was $56,000 for the nine months endedDecember 31, 2003, as compared to other expense of $203,000 for the ninemonths ended December 31, 2002. The decrease in expense is due to aone-time loss recognition of $170,000 on the sale of a fixed asset during thenine months ended December 31, 2002.

 

*Provision for income taxes* For the ninemonths ended December 31, 2003, the Company recorded a provision of$88,000 for state income taxes, due to the suspension by the CaliforniaFranchise Tax Board of the utilization of loss carry forwards.

 

*Net Income. *For the nine months ended December 31, 2003, net income was$910,000, as compared to a net loss of $694,000 for the nine months endedDecember 31, 2002.

 

**Liquidity and CapitalResources**

 

Historically, wehave financed our operations primarily from internally generated funds and, toa lesser extent, loans from stockholders and capital lease obligations. InDecember 1995, we completed an initial public offering of 1,725,000 sharesof common stock (including the exercise of the underwriters’ over allotmentoption), raising net proceeds of approximately $7.7 million. Of such netproceeds, $425,000 was used to repay loans from certain stockholders and theremainder was used to expand manufacturing capability through the leasing andoutfitting of substantially larger facilities, the acquisition of equipmentsufficient to produce higher product quantities and the employment and trainingof additional employees capable of expanding production and sales. FromMarch 2001 through January 2002, we raised approximately$1.0 million in additional funds from the completion of four equityprivate placements. The net proceeds of the equity private placements have alsobeen used to maintain inventory and working capital balances.

 

BetweenJuly 1, 2000 and December 31, 2001, the Company entered into capitalleases for the purpose of acquiring production and test equipment valued inaggregate at $740,000.  The terms of theleases range from 36 months to 60 months and the interest charges range from8.6% to 15.6%. The total amount remaining on the leases at 12/31/03 is$183,000.

 

 In December 2001, we received a loan of$50,000 from Mr. Tiberiu Mazilu, PhD, an officer and director of theCompany. The promissory note calls for quarterly interest payments toDr. Mazilu commencing on September 30, 2002, with the interestpayment calculated quarterly based on the prime interest rate plus 1.25%. Theprincipal amount of the note is due on January 2, 2005 but would becomedue and payable by the Company immediately upon the consolidation or merger ofthe Company with another entity, the death of Dr. Mazilu, or the Company’stermination of Dr. Mazilu’s employment with the Company.

 

InDecember 2002, the Company entered into a non-cancelable capital lease toacquire test equipment valued in aggregate at approximately $50,000. The termsof the lease call for 36 equal monthly payments of $1,699 commencing inDecember 2002 and at an annual interest rate of 13.7%.

 

InJuly 2003 the Company raised $245,000 ($100,000 of which was a conversionfrom an advance received in June 2003) from current officers and directorsand $43,000 from other investors in the form of notes with warrants. The fundswere used for working capital. The promissory notes bear interest at the rateof 8% and have a two-year maturity.

 

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Each warrantentitles the holder to purchase one share of the Company’s common stock at anexercise price of $0.24.  The warrantsexpire five years from the date of issuance. The Company has valued these warrants at $35,000 and is expensing thisvalue over the term of the notes payable. For the nine months ended December 31, 2003, a total of $9,000 wascharged to the statement of operations.

 

InSeptember 2003, we renewed our line of credit with Silicon Valley Bank. Inaddition, we increased our line of credit from $1,000,000 to $2,000,000.  This revolving line of credit bears interestat the bank’s reference rate at prime plus 1%, totaling 5.00% atDecember 31, 2003.  This line of creditis secured by substantially all of the Company’s assets and expires onNovember 20, 2004.  As ofDecember 31, 2003, there was $684,000 in outstanding borrowings under theline of credit. Borrowings under the line of credit are subject to a borrowing baseof accounts receivable, and there are no financial covenants.

 

AtDecember 31, 2003 we had $1,432,000 in cash and cash equivalents. TheCompany’s operating activities created a positive cash flow of approximately$786,000 for the first nine months of the 2004 fiscal year, a direct result ofincreased sales during the first three quarters of the 2004 fiscal year,coupled with decreased production and material costs in the nine months endingDecember 31, 2003. We anticipated that we would make capital expendituresof approximately $300,000 in the fourth quarter of the 2004 fiscal year, buthave revised this projection and anticipate making these expenditures in thefirst quarter of the 2005 fiscal year. We have scheduled principal payments,capital lease payments, and operating lease payments totaling $250,000 infiscal 2004.

 

Intheir report on our financial statements for the fiscal year endedMarch 31, 2003, our auditors have included an explanatory paragraphrelating to our ability to continue as a going concern. For the year endedMarch 31, 2003, we incurred a net loss of $1.2 million and negative cashflows from operations of approximately $119,000 primarily as a result of thereduction of accounts payable balances. The auditors considered that these factorsraise substantial doubt about our ability to continue as a going concern.

 

Webelieve that funds provided from the private placements and the borrowingcapacity from our line of credit may not be sufficient to finance ouroperations for the next 12 months. In addition to the funds raised inJuly 2003, we may attempt to procure additional sources of financing inthe event that the capital available as of December 31, 2003, along withthe capital raised in July 2003, is insufficient for our operating needs.These sources may include, but are not limited to, additional sales of oursecurities. There are, however, no assurances that we will be able tosuccessfully obtain additional financing at terms acceptable to us. Failure toobtain such financing could have a material adverse effect on our ability tooperate as a going concern.

 

**Critical Accounting Policies**

 

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

 

*Revenue recognition.*  We are required to make judgments based onhistorical experience and future expectations, as to the realizability ofshipments made to our customers. These judgments are required to assess thepropriety of the recognition of revenue based on Staff Accounting Bulletin(“SAB”) No. 101, “Revenue Recognition,” and related guidance. We make theseassessments based on customer-specific information, return policies,and historical experience for issues not yet identified.

 

*Inventory.*  We are required to make judgments based on historical experienceand future expectations as to the essential level of inventories necessary tomaintain the business. We make these assessments based on existing orders, ageof the inventory, and historical experience. Management is currently reviewingthe accounting policies regarding the application of overhead to itsinventories.  Management is not certainwhat effect, if any, these accounting policies may have on future operations.

 

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**Additional Factors That MayAffect Future Results**

 

Future operatingresults may be impacted by a number of factors that could cause actual resultsto differ materially from those stated herein, which reflect management’scurrent expectations.  These factorsinclude:

 

•      industry-specific factors (including the reliance upongrowth of the defense microwave market, significant competition characterizedby rapid technological change, new product development, product obsolescence,and significant price erosion over the life of a product);

 

•      our ability to timely develop and produce commerciallyviable products at competitive prices;

 

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

 

•      our ability to accurately anticipate customer demand;

 

•      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.

 

We believe that,to the extent that foreign sales are recognized, we may face increased riskassociated with political and economic instability, compliance with foreignregulatory rules governing export requirements, tariffs and other tradebarriers, differences in intellectual property protections, longer accountsreceivable cycles, currency fluctuations and general trade restrictions.  If any of these risks materialize, theycould have a material adverse effect on our business, results of operations andfinancial condition.

 

We have evaluated the credit exposureassociated with conducting business with foreign customers and have concludedthat such risk is acceptable. Nevertheless, any significant change in the economy or a deteriorationin United States trade relations or the economic or political stability offoreign markets could have a material adverse effect on our business, resultsof operations and financial condition.

 

Sales to foreigncustomers are invoiced in U.S. dollars. Accordingly, we currently do not engage in foreign currency hedgingtransactions.  However, as we expandfurther into foreign markets, we may experience greater risk associated withgeneral business, political and economic conditions in those markets.  At such time, we may seek to lessen ourexposure through currency hedging transactions.  We cannot assure you that a currency hedging strategy would besuccessful in avoiding currency exchange related losses.  In addition, should the relative value ofthe U.S. dollar in comparison to foreign currencies increase, the resultingincrease in the price of our products to foreign customers could result indecreased sales which could have a material adverse impact on our business,results of operations and financial condition.

 

We experiencesignificant price competition and expect price competition in the sale of ourproducts to remain intense.  We cannotassure you that our competitors will not develop new technologies orenhancements to existing products or introduce new products that will offersuperior price or performance features. We expect our competitors to offer newand existing products at prices necessary to gain or retain market share.  Several of our competitors have substantialfinancial resources, which may enable them to withstand sustained pricecompetition or a downturn in the pricing of their products in the future.  Substantially all of our competitors have,and potential future competitors could have, substantially greater technical,marketing, distribution and other resources than we do and have, greater namerecognition and market acceptance of their products and technologies.

 

The markets inwhich we compete are characterized by rapidly changing technology andcontinuous improvements in products and services.  Our future success depends on our ability to enhance our currentproducts and to develop and introduce, in a timely manner, new products thatkeep pace with technological developments, that meet or exceed industrystandards, that compete effectively on the basis of price, performance andquality, that adequately address OEM customer and end-user customer requirements,and that achieve market acceptance.  

 

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We believe that to remaincompetitive in the future we will need to continue to develop new products,which will require the investment of significant financial resources in newproduct development.  In the event ournewly developed products are not timely developed or do not gain marketacceptance, our business, results of operations and financial condition couldbe materially adversely affected.

 

Therecan be no assurances that we will be profitable on a quarter-to-quarter basisin the future. We believe that period-to-period comparisons of our financialresults are not necessarily meaningful and should not be relied upon as anindication of future performance. It is likely that in some future quarter orquarters our revenues or operating results will not meet the expectations ofpublic stock market analysts or investors. In such event, the market price ofour common stock would be materially adversely affected.

 

**Item 3.****        Controlsand Procedures**

 

(a)  *Evaluationof disclosure controls and procedures*. As of the end of the period coveredby this report, the Company carried out an evaluation, under the supervisionand with the participation of the Company’s management, including the Company’sChief Executive Officer and Director of Finance, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedurespursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the ChiefExecutive Officer and Director of Finance concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company required to be included in theCompany’s periodic SEC filings.

 

(b)*Changes in internal controls overfinancial reporting*. There was no change in the Company’s internal controlover financial reporting during the Company’s most recent fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II – OTHERINFORMATION**

 

**Item1.  LegalProceedings**

 

Not Applicable

 

**Item2.  Changes in Securities and Use ofProceeds**

 

Not Applicable

 

**Item3.  Defaults Upon Senior Securities**

 

Not Applicable

 

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

 

Not Applicable

 

**Item 5. Other Information**

 

Not applicable

 

**Item 6.  Exhibits and Reports on Form 8-K**

 
| (a)    |   | Exhibits                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                   |
|   |   | 3.1  Articles of Incorporation   (1)                                                         |
|   |   | 3.2  Bylaws (1)                                                                                   |
|   |   | 31.1 Certification of Chief  Executive Officer Pursuant to 302 of the Sarbanes-Oxley Act of 2002 (2)   |
|   |   | 31.2 Certification of Director  of Finance Pursuant to 302 of the Sarbanes-Oxley Act of  2002 (2) |
|   |   | 32.1 Certification of Chief  Executive Officer Pursuant to 906 of the Sarbanes-Oxley Act of 2002 (2)   |
|   |   | 32.2 Certification of Director  of Finance Pursuant to 906 of the Sarbanes-Oxley Act of 2002 (2)       |

 

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(1)   Previously filed with the Securities and Exchange commissionas an exhibit to the Registration Registration Statement on Form SB-2 No.33-99102-LA and incorporated herein by reference.

(2)   Filed herewith.

 
| (b)    |   | Reports on Form 8-K                                                                         |
|--------|--------|---------------------------------------------------------------------------------------------|
|   |   |                                                                                        |
|   |   | The Company filed Form 8-K on  October 29, 2003, reporting its second quarter results. |

 

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**SIGNATURES**

 

In accordancewith the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |                   | AML Communications, Inc.                                      |   |
|--------|------------------------|---------------------------------------------------------------|--------|
|   |                   |                                                          |   |
|   |                   |                                                          |   |
| Date:  | February 12, 2004 | /s/ Jacob Inbar                                               |   |   |
|   |                   | Jacob Inbar                                                   |   |
|   |                   | Chairman of the Board, President  and Chief Executive Officer |   |
|   |                   |                                                          |   |
|   |                   |                                                          |   |
| Date:  | February 12, 2004 | /s/ Susan J. Fite                                             |   |   |
|   |                   | Susan J. Fite                                                 |   |
|   |                   | Director of Finance and  Chief Accounting Officer             |   |
|        |                        |                                                               |        |  |  |

 

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