**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:        September 30, 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.**                                     |
|-------------------------------------------------------------------|
| (Exact name of small business issuer as specified in its charter) |
|                                                              |
| **Delaware**                                                      |   | **77-0130894** |
| (State or Other jurisdiction of  incorporation or organization)   |   | (IRS Employer  Identification No.) |
|                                                              |
| **1000 Avenida Acaso  Camarillo, California**                     |   | **93012** |
| (Address of principal executive offices)                          |   | (Zip Code) |
|                                                              |
| **(805) 388-1345**                                                |
| (Issuer’s telephone number including area code)              |

 

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 October 17, 2003:  7,837,584

 

Transitional Small BusinessDisclosure Format: Yes o  No ý

 

 

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**AMLCOMMUNICATIONS, INC.**

 

**INDEXTO FORM 10QSB**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                            |
|-------------|----------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                 |
| Item 1.     | Financial Statements                                                                                                 |
|        |                                                                                                                 |
|        | Balance Sheets at September 30, 2003 and March 31, 2003                                                              |
|        |                                                                                                                 |
|        | Statements of Operations for the three-month and six month periods  ended  September 30, 2003 and September 30, 2002 |
|        |                                                                                                                 |
|        | Statements of Cash Flows for the six month periods ended  September 30, 2003 and September 30, 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 2.     | Changes in Securities and Use of Proceeds                                                                            |
|        |                                                                                                                 |
| Item 4.     | Submission of Matters to a Vote of Security  Holders                                                                 |
|        |                                                                                                                 |
| Item 6.     | Exhibits and Reports on Form 8-K                                                                                     |
|        |                                                                                                                 |
|        | **SIGNATURES**                                                                                                       |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**AMLCOMMUNICATIONS, INC.****CONDENSED BALANCE SHEET**

 
|                                                                                                                                                                           |   | **September  30,  2003** |      | **March 31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|---------------------|--------|
|                                                                                                                                                                           |   |                     |      |                |   |
| **ASSETS**                                                                                                                                                                     |   |                     |      |                |   |
| Current Assets:                                                                                                                                                                |   |                     |      |                |   |
| Cash and cash equivalents                                                                                                                                                      |   | $                        | 629,000   |                | $      | 195,000 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $34,000 at September 30, 2003 and $36,000 March 31, 2003                                                       |   | 1,131,000                |      | 609,000             |   |
| Inventories, net                                                                                                                                                               |   | 1,014,000                |      | 1,059,000           |   |
| Other current assets                                                                                                                                                           |   | 106,000                  |      | 135,000             |   |
| Total current assets                                                                                                                                                           |   | 2,880,000                |      | 1,998,000           |   |
|                                                                                                                                                                           |   |                     |      |                |   |
| Property and Equipment, at cost:                                                                                                                                               |   | 4,214,000                |      | 4,267,000           |   |
| Less - Accumulated depreciation and  amortization                                                                                                                              |   | (3,718,000               | )         | (3,631,000          | )      |
|                                                                                                                                                                           |   | 496,000                  |      | 636,000             |   |
|                                                                                                                                                                           |   |                     |      |                |   |
| Other Assets                                                                                                                                                                   |   | 43,000                   |      | 43,000              |   |
|                                                                                                                                                                           |   | $                        | 3,419,000 |                | $      | 2,677,000 |   |
|                                                                                                                                                                           |   |                     |      |                |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                  |   |                     |      |                |   |
|                                                                                                                                                                           |   |                     |      |                |   |
| Current Liabilities:                                                                                                                                                           |   |                     |      |                |   |
| Accounts payable                                                                                                                                                               |   | $                        | 508,000   |                | $      | 568,000 |   |
| Line of credit                                                                                                                                                                 |   | 598,000                  |      | 482,000             |   |
| Current portion of capital lease  obligations                                                                                                                                  |   | 134,000                  |      | 168,000             |   |
| Accrued expenses:                                                                                                                                                              |   |                     |      |                |   |
| Accrued payroll and payroll related  expenses                                                                                                                                  |   | 171,000                  |      | 160,000             |   |
| Accrued state income taxes                                                                                                                                                     |   | 54,000                   |      | —              |   |
| Other accrued liabilities                                                                                                                                                      |   | 12,000                   |      | 243,000             |   |
| Total current liabilities                                                                                                                                                      |   | 1,477,000                |      | 1,621,000           |   |
|                                                                                                                                                                           |   |                     |      |                |   |
| Notes payable – officers                                                                                                                                                  |   | 295,000                  |      | 50,000              |   |
| Notes payable - investors                                                                                                                                                      |   | 43,000                   |      | —              |   |
| Capital Lease Obligations, net of current  portion                                                                                                                             |   | 134,000                  |      | 126,000             |   |
| Total liabilities                                                                                                                                                              |   | 1,949,000                |      | 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; 7,836,959 shares issued and outstanding at  September 30, 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                                                                                                                                                            |   | (8,941,000               | )         | (9,494,000          | )      |
| Total stockholders’ equity                                                                                                                                                |   | 1,470,000                |      | 880,000             |   |
|                                                                                                                                                                           |   | $                        | 3,419,000 |                | $      | 2,677,000 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**AMLCOMMUNICATIONS, INC.****STATEMENTS OF OPERATIONS**

 
|                                                                   |   | **Three  Months Ended**  |      | **Six Months  Ended**    |   |
|------------------------------------------------------------------------|--------|--------------------------|-----------|--------------------------|--------|
|                                                                   |   | **September  30,  2003** |      | **September  30,  2002** |   | **September  30,  2003** |   | **September  30,  2002** |   |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Net sales                                                              |   | $                        | 1,729,000 |                     | $      | 1,041,000 |   | $ | 3,277,000 |   | $ | 2,372,000 |   |
| Cost of goods sold                                                     |   | 805,000                  |      | 687,000                  |   | 1,636,000 |   | 1,395,000 |   |
| Gross profit                                                           |   | 924,000                  |      | 354,000                  |   | 1,641,000 |   | 977,000 |   |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Operating expenses:                                                    |   |                     |      |                     |   |   |   |   |   |
| Selling, general & administrative                                  |   | 379,000                  |      | 342,000                  |   | 644,000 |   | 641,000 |   |
| Research and development                                               |   | 174,000                  |      | 313,000                  |   | 373,000 |   | 636,000 |   |
|                                                                   |   | 553,000                  |      | 655,000                  |   | 1,017,000 |   | 1,277,000 |   |
| Profit (loss) from operations                                          |   | 371,000                  |      | (301,000                 | )      | 624,000 |   | (300,000 | ) |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Other income (expense), net                                            |   | 14,000                   |      | (177,000                 | )      | (16,000 | ) | (194,000 | ) |
| Profit (loss) before provision for income  taxes                       |   | 385,000                  |      | (478,000                 | )      | 608,000 |   | (494,000 | ) |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Provision for income taxes                                             |   | 54,000                   |      | —                   |   | 54,000 |   | — |   |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Net profit (loss)                                                      |   | $                        | 331,000   |                     | $      | (478,000 | ) | $ | 554,000 |   | $ | (494,000 | ) |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Basic earnings (loss) per common share                                 |   | $                        | 0.04      |                     | $      | (0.06 | ) | $ | 0.07 |   | $ | (0.06 | ) |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Basic weighted average number of shares of  common stock outstanding   |   | 7,832,000                |      | 7,829,000                |   | 7,831,000 |   | 7,829,000 |   |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Diluted earnings (loss) per common share                               |   | $                        | 0.03      |                     | $      | (0.06 | ) | $ | 0.06 |   | $ | (0.06 | ) |
|                                                                   |   |                     |      |                     |   |   |   |   |   |
| Diluted weighted average number of shares  of common stock outstanding |   | 9,616,000                |      | 7,829,000                |   | 9,615,000 |   | 7,829,000 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**AMLCOMMUNICATIONS, INC.****STATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **Six Months  Ended**    |    |
|---------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                  |   | **September  30,  2003** |    | **September  30,  2002** |   |
|                                                                                  |   |                     |    |   |   |
| Cash Flows from Operating Activities:                                                 |   |                     |    |   |   |
| Net Profit (loss)                                                                     |   | $                        | 554,000 |   | $ | (494,000 | ) |
| Adjustments to reconcile net profit (loss)  to net cash used in operating activities: |   |                     |    |   |   |
| Interest on debt discount fees                                                        |   | 4,000                    |    | — |   |
| Depreciation and amortization                                                         |   | 150,000                  |    | 298,000 |   |
| Bad debt expense                                                                      |   | (1,000                   | )       | — |   |
| Loss (gain) on sale of fixed assets                                                   |   | (48,000                  | )       | — |   |
| Changes in assets and liabilities:                                                    |   |                     |    |   |   |
| Decrease (increase) in:                                                               |   |                     |    |   |   |
| Accounts receivable                                                                   |   | (522,000                 | )       | 658,000 |   |
| Inventories                                                                           |   | 45,000                   |    | 89,000 |   |
| Other current assets                                                                  |   | 28,000                   |    | 75,000 |   |
| Other assets                                                                          |   | —                   |    | (7,000 | ) |
| Increase (decrease) in:                                                               |   |                     |    |   |   |
| Accounts payable                                                                      |   | (60,000                  | )       | (451,000 | ) |
| Accrued state income taxes                                                            |   | 54,000                   |    | — |   |
| Accrued expenses                                                                      |   | (189,000                 | )       | 14,000 |   |
| Net cash from operating activities                                                    |   | 15,000                   |    | 182,000 |   |
|                                                                                  |   |                     |    |   |   |
| Cash Flows from Investing Activities:                                                 |   |                     |    |   |   |
| Purchases of property and equipment                                                   |   | (9,000                   | )       | (70,000 | ) |
| Proceeds from the sale of property and  equipment                                     |   | 48,000                   |    | — |   |
| Net cash provided by (used in) investing  activities                                  |   | 39,000                   |    | (70,000 | ) |
|                                                                                  |   |                     |    |   |   |
| Cash Flows from Financing Activities:                                                 |   |                     |    |   |   |
| Exercise of stock options                                                             |   | 1,000                    |    | — |   |
| Proceeds from line of credit                                                          |   | 117,000                  |    | 101,000 |   |
| Proceeds from notes payable – related  parties                                   |   | 245,000                  |    | — |   |
| Proceeds from notes payable - investors                                               |   | 43,000                   |    | — |   |
| Principal payments on capital lease  obligations                                      |   | (26,000                  | )       | (53,000 | ) |
| Net cash provided by financing activities                                             |   | 380,000                  |    | 48,000 |   |
|                                                                                  |   |                     |    |   |   |
| Net Increase in Cash and Cash Equivalents                                             |   | 434,000                  |    | 160,000 |   |
| Cash and Cash Equivalents, beginning of  period                                       |   | 195,000                  |    | 160,000 |   |
| Cash and Cash Equivalents, end of period                                              |   | $                        | 629,000 |   | $ | 320,000 |   |
|                                                                                  |   |                     |    |   |   |
| Supplemental disclosures of cash flow  information:                                   |   |                     |    |   |   |
| Cash paid during the period for:                                                      |   |                     |    |   |   |
| Interest                                                                              |   | $                        | 64,000  |   | $ | 34,000 |   |
|                                                                                  |   |                     |    |   |   |
| Non-cash transactions:                                                                |   |                     |    |   |   |
| Debt incurred to purchased property and  equipment                                    |   | $                        | —  |   | $ | 50,000 |   |

 

The accompanying notes are an integral partof these financial statements.

 

5

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**AMLCOMMUNICATIONS, INC.****NOTES TO FINANCIAL STATEMENTS****SEPTEMBER30, 2003**

 

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

 

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

 

Theaccompanying unaudited financial statements have been prepared in conformitywith accounting principles generally accepted in the United States.  However, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beenomitted or condensed pursuant to the rules and regulations of the Securitiesand Exchange Commission (“SEC”).  In theopinion of management, all adjustments (consisting of normal recurringadjustments) necessary for a fair presentation have been included.  The results of operations and cash flows forthe three-month period presented are not necessarily indicative of the resultsof operations for a full year.  Thesefinancial statements should be read in conjunction with the Company’s March 31,2003 audited financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB.

 

Going Concern Issues

 

In connectionwith the audit for the year ended March 31, 2003, we received a report from ourindependent certified public accountants that includes an explanatory paragraphdescribing uncertainty in our ability to continue as a going concern.  Our financial statements included hereincontemplate our ability to continue and as such do not include any adjustmentsthat might result from this uncertainty. These financial statements should beread in conjunction with the Company’s March 31, 2003 audited financialstatements and notes thereto included in the Company’s Annual Report on Form10-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 thedilutive effect of outstanding stock options (applying the treasury stockmethod).

 

**3.**             **Inventories**

 

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

 
|            |   | **September  30, 2003** |       | **March 31,  2003** |       |
|-----------------|--------|-------------------------|------------|---------------------|------------|
|            |   |                    | ** ** |                | ** ** |
| Raw materials   |   | $                       | 730,000    |                | $          | 800,000 |   |
| Work-in-process |   | 140,000                 |       | 132,000             |       |
| Finished goods  |   | 144,000                 |       | 127,000             |       |
|            |   | $                       | 1,014,000  |                | $          | 1,059,000 |   |

 

6

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**4.****                                      Lineof Credit**

 

In September2003, we renewed our line of credit with Silicon Valley Bank. In addition, weincreased 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% at September 30,2003.  This line of credit is secured bysubstantially all of the Company’s assets and expires on November 20, 2004. Asof September 30, 2003, there was $598,000 in outstanding borrowings under theline of credit. Borrowings, under the line of credit, are subject to aborrowing base of accounts receivable, and there are no financial covenants.

 

**5.****                                      RecentlyIssued 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.

 

In May 2003,the FASB issued Statement of Financial Accounting Standards No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity,” (“SFAS 150”). SFAS 150 establishes standardsfor how an issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances). Many of those instruments were previouslyclassified as equity. SFAS 150 is effective for financial 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.

 

**6.****                                      ListingHistory**

 

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 fromOctober 8, 2001 to August 13, 2002 and on the Nasdaq National Marketprior to that time.  We were de-listedfrom NASDAQ because of our failure to meet the $1.00 minimum bid pricerequirement.

 

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

This filingcontains forward-looking statements, which involve risks anduncertainties.  The Company’s actualfuture results may differ materially from the results discussed in theforward-looking statements.  When usedin this report, the words “expects” “anticipates” and “estimates” and similarexpressions are intended to identify forward-looking statements. Factors thatcould cause actual results to differ materially from those expressed in anyforward-looking statement made by the Company 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 new products;

•      ourability to design new products successfully;

•      ourfailure to acquire new customers in the future;

•      thecontinued or new deterioration of business and economic conditions in ourcustomers’ marketplaces;

•      intenselycompetitive industry conditions with increasing price competition; and

•      therate of growth in the wireless and MIC communications markets.

 

Please readthe factors set forth in “Additional Factors That May Affect Future Results”and other risks detailed in the Company’s SEC filings.  The Company undertakes no obligation topublicly release any revisions to

 

7

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these forward-lookingstatements to reflect events or circumstances after the date this report isfiled with the SEC or to reflect the occurrence of unanticipated events.

 

**Results of Operations**

 

**Three Months Ended September 30, 2003Compared to Three Months Ended September 30, 2002**

 

*Net sales. *Net sales for the three months ended September30, 2003 were $1.7 million, as compared to net sales of $1.0 million for the threemonths ended September 30, 2002, an increase of 66.1%.  The increase in net sales is attributed tothe higher volume of shipments in the defense related MIC products.  MIC sales accounted for $1.6 million, or93.8% of net sales for the three months ended September 30, 2003, as comparedto $906,000, or 87.0% of net sales for the three months ended September 30,2002. Additionally, the PCS and wireless messaging market, produced $107,000,or 6.2% of net sales for the three months ended September 30, 2003, ascompared to $135,000, or 13.0% of net sales for the three months endedSeptember 30, 2002.

 

*Gross profit. *Gross profit for the three months endedSeptember 30, 2003 was $924,000 or 53.4% of net sales, compared to a grossprofit of $354,000, or 34.0% of net sales for the three months ended September30, 2002.  Gross profit increased as aresult of the increase in sales coupled with the decrease in manufacturingoverhead costs.

 

*Selling, general and administrativecosts. *Selling,general, and administrative costs were $379,000, or 21.9% of net sales, for thethree months ended September 30, 2003, as compared to $342,000, or 32.8% of netsales, for the three months ended September 30, 2002.  The increase is attributed to higher professional fees and costsassociated with Investor Relations.  TheCompany also continued to benefit from substantial salary reductionsimplemented in 2001 for its key executive founders.  Those officers have voluntarily agreed to below-market salariesto assist the Company during difficult times.

* *

*Research and development costs. *Research anddevelopment costs were $174,000, or 10.0% of net sales, for the three monthsended September 30, 2003, as compared to $313,000, or 30.1% of net sales, forthe three months ended September 30, 2002. The two contributing factors are; asignificant decrease in depreciation expenses, as a result of assets reachingfull depreciation, and a reduction in engineering labor costs, as a result ofprevious head count reductions.

 

*Other income, net. *Other income was $14,000 for the threemonths ended September 30, 2003, as compared to other expenses of $177,000, forthe three months ended September 30, 2002. The company recognized a $48,000 gain on the sale of fixed assets,offset by interest expenses of $34,000 for the three months ended September 30,2003, as compared to the $170,000 loss on the sale of fixed assets for thethree months ended September 30, 2002.

* *

*Provision for income taxes.*The company recorded a provision of $54,000 for the six months ended September30, 2003 for State Income Taxes, due to the California suspension on theutilization of loss carry forwards.

* *

*Net Income. *For the reasons set forth above, we generated anet income of $331,000 for the three months ended September 30, 2003, ascompare to a net loss of $478,000 for the three months ended September 30,2002.

 

**Six Months Ended September 30, 2002 Comparedto Six Months Ended September 30, 2001**

 

*Net sales. *Net sales were $3.3 million for the six monthsended September 30, 2003, as compared to net sales of $2.4 million for the sixmonths ended September 30, 2002, an increase of 38.2%. The increase in netsales is largely attributed to the higher volume of shipments in the defenserelated MIC products.  MIC salesaccounted for $3.2 million, or 96.1% of net sales for the six months endedSeptember 30, 2003, as compared to $2.1 million, or 89.7% of net sales for thesix months ended September 30, 2002. The PCS and wireless messaging marketproduced  $129,000, or 3.9% of net salesfor the six months ended September 30, 2003, as compared to $243,000, or 10.3%of net sales for the six months ended September 30, 2002.

 

8

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*Gross profit. *Gross profit was $1.6 million, or 50.1%of net sales, for the six months ended September 30, 2003, as compared to$977,000, or 41.2% of net sales, for the six months ended September 30, 2002.Gross profit improved as a result of the increase in sales coupled with thedecrease in manufacturing overhead costs

* *

*Selling, general, and administrativecosts. *Selling,general and administrative costs were $644,000, or 19.7% of net sales, for thesix months ended September 30, 2003, as compared to $641,000, or 27.0% of netsales, for the six months ended September 30, 2002.

* *

*Research and development costs. *Research anddevelopment costs were $373,000, or 11.4% of net sales, for the six monthsended September 30, 2003, as compared to $636,000, or 26.8% of net sales, forthe six months ended September 30, 2002. The two contributing factors are; asignificant decrease in depreciation expenses, as a result of assets reachingfull depreciation, and a reduction in engineering labor costs, as a result ofprevious head count reductions.

 

*Other expense. *Other expense was $16,000 for the sixmonths ended September 30, 2003, as compared to other expense of $194,000 forthe six months ended September 30, 2002. The decrease in expense is due to aone-time loss recognition of $170,000 on the sale of a fixed asset, during thesix months ended September 30, 2002.

* *

*Provision for income taxes. *The companyrecorded a provision of $54,000 for the six months ended September 30, 2003 forState Income Taxes, due to the California suspension on the utilization of losscarry forwards.

 

*Net Income. *For the reasons set forth above, we generated anet income of $554,000 for the six months ended September 30, 2003, as compareto a net loss of $494,000 for the six months ended September 30, 2002.

 

 

**Liquidity and Capital Resources**

 

Historically,we have financed our operations primarily from internally generated funds and,to a 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. From March 2001through January 2002, we raised approximately $1.0 million inadditional funds from the completion of four (4) equity privateplacements. The net proceeds of the equity private placements have also beenused to maintain inventory and working capital balances.

 

InApril 2001, we entered into three non-cancelable capital leases to acquiretest equipment valued in aggregate at $137,000. The terms of the leases areidentical and call for 36 equal monthly aggregate payments of $4,396,commencing in April 2001, and at an annual interest rate of 9.4%.

 

InDecember 2001, we entered into a non-cancelable capital lease to acquiretest equipment valued at $53,000. The terms of the lease call for 48 equalmonthly aggregate payments of $1,504 commencing in December 2001 and at anannual interest rate of 15.63%.

 

InDecember 2001, we entered into a promissory note payable with a principalvalue of $50,000 with Mr. Tiberiu Mazilu, PhD, an officer and director ofthe Company. The terms of the note call 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.

 

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InJune 2002, the Company entered into a non-cancelable capital lease toacquire test equipment valued at approximately $50,000. The terms of the leasecalled for 12 equal monthly aggregate payments of $4,192 commencing inJuly 2002 with no annual interest.

 

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%.

 

In July 2003the Company raised $245,000  ($100,000of which was a conversion from an advance received in June 2003), from currentofficers and directors, and $43,000 form outside investors, in the form ofnotes with warrants. The promissory notes bear interest at the rate of 8% andhave a two-year maturity. Each warrant entitled the holder to purchase oneshare of the Company’s common stock at an exercise price of $0.24.  The warrants expire five years from the dateof issuance.  The Company has valuedthese warrants at $35,000 and is expensing this value over the term of thenotes payable.  For the quarter endedSeptember 30, 2003, a total of $4,000 was charged to the statement ofoperations.

 

In September2003, we renewed our line of credit with Silicon Valley Bank. In addition, weincreased 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% at September 30,2003.  This line of credit is secured bysubstantially all of the Company’s assets and expires on November 20,2004.  As of September 30, 2003, therewas $598,000 in outstanding borrowings under the line of credit. Borrowingsunder the line of credit are subject to a borrowing base of accountsreceivable, and there are no financial covenants.

 

At September30, 2003, we had $629,000 in cash and cash equivalents. The Company’s operatingactivities created a positive cash flow of approximately $15,000 for the firstsix months of fiscal 2004, a direct result of increased sales during the firsttwo quarters of fiscal 2004, coupled with decreased production and materialcost in the second fiscal quarter ending September 30, 2003. We anticipatecapital expenditures of approximately $300,000 in the fourth quarter of fiscal2004. We have scheduled principal payments; capital lease payments andoperating lease payments totaling $250,000 in fiscal 2004.

 

Our auditorshave included an explanatory paragraph relating to our ability to continue as agoing concern as of our fiscal year ended March 31, 2003, in their Report ofCertified Public Accountants included in our audited financial statementscontained in our Form 10-KSB. For the year ended March 31, 2003, we incurred anet loss of $1.2 million and negative cash flows from operations ofapproximately $119,000 primarily as a result of the reduction of accountspayable balances. The auditors considered that these factors raise substantialdoubt about our ability to continue as a going concern.

 

We believethat funds provided from the private placements and the borrowing capacity fromour line of credit may not be sufficient to finance our operations for the next12 months. In addition to the funds raised in July 2003, we may attempt toprocure additional sources of financing in the event that the capital availableas of September 30, 2003, along with the capital raised in July 2003, isinsufficient for our operating needs. These sources may include, but are notlimited to, an equity investment in the Company by a third party. There are,however, no assurances that we will be able successfully obtain additionalfinancing at terms acceptable to us. Failure to obtain such financing couldhave a material adverse effect on our ability to operate as a going concern.

 

**CriticalAccounting Policies**

 

Our discussionand analysis of our financial conditions and results of operations are basedupon our financial statements, which have been prepared in accordance withgenerally accepted accounting principles in the United States. The preparationof financial statements requires managers to make estimates and disclosures onthe date of the financial statements. On an on-going basis, we evaluate ourestimates, including, but not limited to, those related to revenue recognition.We use authoritative pronouncements, historical experience and otherassumptions as the basis for making judgments. Actual results could differ fromthose estimates. We believe that the following critical accounting policiesaffect our more significant judgments and estimates in the preparation of ourfinancial 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 the

 

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propriety of the recognition ofrevenue based on Staff Accounting Bulletin (“SAB”) No. 101, “RevenueRecognition,” and related guidance. We make these assessments based on thefollowing factors; customer-pecific information, return policies,and historical experience for issues not yet identified.

 

*Inventory.*  We are required to make judgments based onhistorical experience and future expectations as to the essential level ofinventories necessary to maintain the business. We make these assessments basedon the following factors; existing orders, age of the inventory, andhistorical experience. Management is currently reviewing the accountingpolicies regarding the application of overhead to its inventories and is unableto estimate any effect it may have on future operations.

 

**Additional Factors That May Affect FutureResults**

 

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

 

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

 

•                  our ability totimely develop and produce commercially viable products at competitive prices;

 

•                  our ability toproduce products which meet the quality standards of both existing andpotential new customers;

 

•                  our ability toaccurately anticipate customer demand;

 

•                  our ability tomanage expense levels, the availability and cost of components;

 

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

 

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

 

We believethat, to the extent that foreign sales are recognized, we may face increasedrisk associated with political and economic instability, compliance withforeign regulatory 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 exposure associated with conductingbusiness with foreign customers and have concluded that such risk isacceptable.  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 do not engage in foreign currencyhedging transactions.  However, as weexpand further into foreign markets, we may experience greater risk associatedwith general 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 cannot assureyou that our competitors will not develop new technologies or enhancements toexisting products or introduce new products that will offer superior price orperformance features. We expect our competitors to offer new and existingproducts at prices necessary to gain or retain market share.  Several of our

 

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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, or could have,greater name recognition and market acceptance of their products andtechnologies.

 

The markets,in which our customers and we compete, are characterized by rapidly changingtechnology and continuous improvements in products and services.  Our future success depends on our ability toenhance our current products and to develop and introduce, in a timely manner,new products that keep pace with technological developments, industrystandards, compete effectively on the basis of price, performance and quality,adequately address OEM customer and end-user customer requirements, and achievemarket acceptance.  We believe that toremain competitive in the future we will need to continue to develop newproducts, which will require the investment of significant financial resourcesin new product development.  In theevent our newly developed products are not timely developed or do not gainmarket acceptance, our business, results of operations and financial conditioncould be materially adversely affected.

 

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 assurancethat we will not experience such fluctuations in the future. We establish ourexpenditure levels for product development and other operating expenses basedon expected revenues, and expenses are relatively fixed in the short term. As aresult, variations in timing of revenues can cause significant variations inquarterly results of operations. There can be no assurances that we will beprofitable on a quarter-to-quarter basis in the future. We believe thatperiod-to-period comparisons of our financial results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance. Due to these factors, 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.

 

**Item3.****                                   Controlsand Procedures**

 

(a)  *Evaluation of disclosure controls and procedures*.As of the end of the period covered by this report, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Director ofFinance, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Exchange Act Rule 13a-14.Based upon that evaluation, the Chief Executive Officer and Director of Financeconcluded that the Company’s disclosure controls and procedures are effectivein timely alerting them to material information relating to the Companyrequired to be included in the Company’s periodic SEC filings.

 

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

 

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#### **PART II - OTHER INFORMATION**

 

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

 

In July 2003,the Company raised $288,000 ($100,000 of which was a conversion from an advancereceived in June 2003), primarily from current officers and directors, in theform of notes with warrants.  Thepromissory notes bear interest at the rate of 8% and have a two-year maturity,with five-year warrants at 20% of the investment.  The Company did not engage in general solicitation oradvertising, and the securities issued in the transaction bear appropriaterestrictive legends concerning the registration requirements of the SecuritiesAct of 1933.  The Company believes thistransaction was exempt from the registration requirements of the Securities Actof 1933 based Section 4(2) of the Securities Act of 1933.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

The AnnualMeeting of Stockholders was held on September 3, 2003.  The only matter submitted to a vote of theCompany’s stockholders was the election of six directors.  The stockholders re-elected all six of theexisting directors by the following vote:

 
|                 |   | **Votes For** |   | **Votes  Against** |   | **Votes  Withheld** |   |
|----------------------|--------|---------------|--------|--------------------|--------|---------------------|--------|
| Jacob Inbar          |   | 6,450,290     |   | 30,594             |   | 0                   |   |
| David A. Derby       |   | 6,460,234     |   | 20,650             |   | 0                   |   |
| Richard W. Flatow    |   | 6,460,234     |   | 20,650             |   | 0                   |   |
| Tiberiu Mazilu, Ph.D |   | 6,450,290     |   | 30,594             |   | 0                   |   |
| Edwin J. McAvoy      |   | 6,450,290     |   | 30,594             |   | 0                   |   |
| Gerald M. Starek     |   | 6,444,634     |   | 36,250             |   | 0                   |   |

 

**Item6.****    Exhibits and Reports on Form8-K.**

 

(a)                                                   Exhibits

 

10.1 Form of Promissory Note

10.2 Form of Warrant

10.3 Accounts Receivable Purchase Modification Agreement

31.1 Certification of Chief Executive Officer Pursuant to 302 of theSarbanes-Oxley Act of 2002

31.2 Certification of Director of Finance Pursuant to 302 of theSarbanes-Oxley Act of  2002

32.1 Certification of Chief Executive Officer Pursuant to 906 of theSarbanes-Oxley Act of 2002

32.2 Certification of Director of Finance Pursuant to 906 of theSarbanes-Oxley Act of 2002

 

(b)                                                  Reportson Form 8-K

 

99.  The Company filed Form 8-Kon August 7, 2003, furnishing the Company’s first quarter results under Item12.

 

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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:  | November 12,  2003                                            | /s/ Jacob  Inbar |   |
|   | Jacob Inbar                                                   |
|   | Chairman of the Board, President  and Chief Executive Officer |
|   |
|   |
| Date:  | November 12,  2003                                            | /s/Susan J.  Fite |   |
|   | Susan J.  Fite                                                |
|   | Director of Finance and  Chief Accounting Officer             |

 

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