**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

| **(Mark  One)**                                                                                                                                                                                                                                                                 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                            |
| **[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                            |
| **For the  quarterly period ended June 30, 2003**                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                            |
| **[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                            |
| **For the  transition period from                       to                     ** |
|                                                                                                                                                                                                                                                                            |
| **Commission file number 000-30656**                                                                                                                                                                                                                                            |

 

**APOGEE TECHNOLOGY, INC.**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                                       |   | **04-3005815**                         |
|------------------------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization)                   |   | (I.R.S.  Employer  Identification No.) |
|                                                                               |   |                                   |
| **129 MORGAN DRIVE, NORWOOD, MASSACHUSETTS 02062**                                 |
| (Address  of principal executive offices)                                          |
|                                                                               |   |                                   |
| **(781) 551-9450**                                                                 |
| (Issuer’s  telephone number, including area code)                             |
|                                                                               |   |                                   |
| **NOT APPLICABLE.**                                                                |
| (Former  name, former address and former fiscal year,if changed since last report) |

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

State the number of shares of each of the Issuer’s classes of commonequity, as of the latest practicable date: As of August 8, 2003, there were 5,453,085 shares of Common Stock, $.01par value per share, outstanding.

 

Transitional Small BusinessDisclosure Format (Check one):  Yes o No ý

 

 

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**APOGEE TECHNOLOGY, INC.**

 

**INDEX OF INFORMATION CONTAINED IN FORM 10-QSBFOR THEQUARTER ENDED JUNE 30, 2003**

 

**PART I-FINANCIAL INFORMATION**

 
| Item 1 - Financial  Statements (Unaudited)                                                          |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                | Condensed Consolidated Balance Sheets at  June 30, 2003 and December 31, 2002. |
|                                                                                                | Condensed Consolidated Statements of  Operations and Accumulated |
|                                                                                                |   | Deficit for the Three and Six Months Ended  June 30, 2003 and June 30, 2002. |
|                                                                                                | Condensed Consolidated Statements of Cash  Flows for the Six Months |
|                                                                                                |   | Ended June 30, 2003 and June 30, 2002. |
|                                                                                                | Notes  to Condensed Consolidated Financial Statements. |
|                                                                                                |   |
| Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operation |
|                                                                                                |   |   |
| Item 3 - Quantitative and Qualitative  Disclosures about Market Risk                                |
|                                                                                                |   |   |
| Item 4 - 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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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
|                                                                                                          |   | **JUNE 30,  2003** |          | **DECEMBER  31,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------|---------------|-------------------------|------------|
|                                                                                                          |   | **(Unaudited)**    |          |                    | ** ** |
| **ASSETS**                                                                                                    |   |               |          |                    |       |
|                                                                                                          |   |               |          |                    |       |
| **Current assets**                                                                                            |   |               |          |                    |       |
| Cash  and cash equivalents                                                                                    |   | **$**              | **870,570**   |                    | $          | 994,296 |   |
| Accounts  receivable, net of allowance for doubtfulaccounts of $35,000 in 2003  and $25,000 in 2002           |   | **3,307,482**      |          | 2,030,492               |       |
| Inventories                                                                                                   |   | **833,886**        |          | 138,702                 |       |
| Prepaid  expenses and other current assets                                                                    |   | **162,131**        |          | 102,772                 |       |
| Total  current assets                                                                                         |   | **5,174,069**      |          | 3,266,262               |       |
|                                                                                                          |   |               |          |                    |       |
| **Property and equipment, net of accumulated depreciation of  $342,061 in 2003 and $307,381 in 2002**         |   | **128,915**        |          | 139,332                 |       |
|                                                                                                          |   |               |          |                    |       |
| **Other assets**                                                                                              |   |               |          |                    |       |
| Digital  amplifier patents, net of accumulated amortization of $93,607 in 2003 and  $84,005 in 2002           |   | **90,418**         |          | 93,256                  |       |
|                                                                                                          |   | **$**              | **5,393,402** |                    | $          | 3,498,850 |   |
|                                                                                                          |   |               |          |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                 |   |               |          |                    |       |
|                                                                                                          |   |               |          |                    |       |
| **Current liabilities**                                                                                       |   |               |          |                    |       |
| Accounts  payable and accrued expenses                                                                        |   | **$**              | **2,051,421** |                    | $          | 999,919 |   |
| Bank  line of credit                                                                                          |   | **400,000**        |          | —                  |       |
| Deposit  for common stock to be issued                                                                        |   | **300,000**        |          | —                  |       |
| Current  maturities of capital lease obligations                                                              |   | **9,517**          |          | 16,514                  |       |
| Total  current liabilities                                                                                    |   | **2,760,938**      |          | 1,016,433               |       |
|                                                                                                          |   |               |          |                    |       |
| **Capitalized lease obligations - net of current maturities**                                                 |   | **564**            |          | 3,462                   |       |
| Total  liabilities                                                                                            |   | **2,761,502**      |          | 1,019,895               |       |
|                                                                                                          |   |               |          |                    |       |
| **Stockholders’ equity**                                                                                 |   |               |          |                    |       |
| Common  stock, $.01 par value;                                                                                |   |               |          |                    |       |
| 20,000,000  shares authorized, 5,393,085 and 5,370,585 issued and outstanding in 2003 and  2002, respectively |   | **53,931**         |          | 53,706                  |       |
| Additional  paid-in capital                                                                                   |   | **13,650,451**     |          | 13,599,926              |       |
| Accumulated  deficit                                                                                          |   | **(11,072,482**    | **)**         | (11,174,677             | )          |
| Total  stockholders’ equity                                                                              |   | **2,631,900**      |          | 2,478,955               |       |
|                                                                                                          |   | **$**              | **5,393,402** |                    | $          | 3,498,850 |   |

 

*TheAccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONSAND ACCUMULATED DEFICIT

 
|                                                                |   | **THREE  MONTHS ENDED  JUNE 30,** |            | **SIX MONTHS  ENDED  JUNE 30,** |       |
|---------------------------------------------------------------------|--------|-----------------------------------|-----------------|---------------------------------|------------|
|                                                                |   | **2003**                          |            | **2002**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Revenues**                                                        |   |                              |            |                            |       |   |   |   |   |
| Product  sales                                                      |   | **$**                             | **2,685,292**   | ** **                      | $          | 1,059,452 |   | **$** | **4,204,885** |   | $ | 1,345,501 |   |
| Royalties                                                           |   | **347,335**                       | ** **      | 278,969                         |       | **667,334** |   | 400,934 |   |
| Consulting                                                          |   | **—**                        | ** **      | 26,471                          |       | **—** |   | 39,871 |   |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
|                                                                |   | **3,032,627**                     |            | 1,364,892                       |       | **4,872,219** |   | 1,786,306 |   |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| **Costs and expenses**                                              |   |                              | ** **      |                            |       |   |   |   |   |
| Product  sales                                                      |   | **1,864,686**                     | ** **      | 705,586                         |       | **2,932,927** |   | 918,243 |   |
| Research  and development                                           |   | **373,261**                       | ** **      | 405,627                         |       | **729,741** |   | 798,839 |   |
| Selling,  general and administrative                                |   | **553,479**                       | ** **      | 470,799                         |       | **1,110,360** |   | 1,062,445 |   |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
|                                                                |   | **2,791,426**                     |            | 1,582,012                       |       | **4,773,028** |   | 2,779,527 |   |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| **Income (loss) before other income****(expense)**                  |   | **241,201**                       | ** **      | (217,120                        | )          | **99,191** |   | (993,221 | ) |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| **Other income (expense)**                                          |   |                              | ** **      |                            |       |   |   |   |   |
| Interest  expense                                                   |   | **(1,350**                        | **)**           | (1,628                          | )          | **(1,849** | **)** | (3,714 | ) |
| Interest  income                                                    |   | **1,680**                         | ** **      | 8,816                           |       | **4,853** |   | 18,006 |   |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
|                                                                |   | **330**                           |            | 7,188                           |       | **3,004** |   | 14,292 |   |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| **Net income (loss)**                                               |   | **241,531**                       | ** **      | (209,932                        | )          | **102,195** |   | (978,929 | ) |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| Accumulated  deficit - beginning                                    |   | **(11,314,013**                   | **)**           | (10,878,335                     | )          | **(11,174,677** | **)** | (10,109,338 | ) |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| **Accumulated deficit - ending**                                    |   | **$**                             | **(11,072,482** | **)**                           | $          | (11,088,267 | ) | **$** | **(11,072,482** | **)** | $ | (11,088,267 | ) |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| **Basic and diluted income (loss) per common share**                |   | **$**                             | **0.04**        | ** **                      | $          | (0.04 | ) | **$** | **0.02** |   | $ | (0.19 | ) |
|                                                                |   |                              | ** **      |                            |       |   |   |   |   |
| **Weighted average common shares outstanding - basic and  diluted** |   | **5,387,123**                     | ** **      | 5,241,229                       |       | **5,381,088** |   | 5,232,577 |   |

 

*TheAccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                    |   | **SIX MONTHS ENDED****JUNE 30,** |        |
|-----------------------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                                    |   | **2003**                         |        | **2002** | ** ** |
| **Cash flows from operations**                                                          |   |                             |        |   |   |
| Net  income (loss)                                                                      |   | **$**                            | **102,195** |   | $ | (978,929 | ) |
| *Adjustments to reconcile net income (loss) to net cash  used in operating activities:* |   |                             |        |   |   |
| Provision  for doubtful accounts                                                        |   | **10,000**                       |        | 10,000 |   |
| Depreciation  and amortization                                                          |   | **44,282**                       |        | 48,742 |   |
| *Changes in operating assets and liabilities:*                                          |   |                             |        |   |   |
| Accounts  receivable                                                                    |   | **(1,286,990**                   | **)**       | (1,161,204 | ) |
| Inventories                                                                             |   | **(695,184**                     | **)**       | 122,327 |   |
| Prepaid  expenses and other current assets                                              |   | **(59,359**                      | **)**       | 6,990 |   |
| Accounts  payable and accrued expenses                                                  |   | **1,051,502**                    |        | 444,720 |   |
|                                                                                    |   |                             |        |   |   |
| Net  cash used in operating activities                                                  |   | **(833,554**                     | **)**       | (1,507,354 | ) |
|                                                                                    |   |                             |        |   |   |
| **Cash flows from investing activities**                                                |   |                             |        |   |   |
| Purchases  of property and equipment                                                    |   | **(24,263**                      | **)**       | (16,603 | ) |
| Patent  costs                                                                           |   | **(6,764**                       | **)**       | (33,364 | ) |
|                                                                                    |   |                             |        |   |   |
| Net  cash used in investing activities                                                  |   | **(31,027**                      | **)**       | (49,967 | ) |
|                                                                                    |   |                             |        |   |   |
| **Cash flows from financing activities**                                                |   |                             |        |   |   |
| Proceeds  from issuances of common stock                                                |   | **50,750**                       |        | 32,852 |   |
| Deposit  for common stock to be issued                                                  |   | **300,000**                      |        | — |   |
| Proceeds  from bank line of credit                                                      |   | **400,000**                      |        | — |   |
| Repayment  of capital lease obligations                                                 |   | **(9,895**                       | **)**       | (17,857 | ) |
|                                                                                    |   |                             |        |   |   |
| Net  cash provided by financing activities                                              |   | **740,855**                      |        | 14,995 |   |
|                                                                                    |   |                             |        |   |   |
| **Decrease in cash and cash equivalents**                                               |   | **(123,726**                     | **)**       | (1,542,326 | ) |
|                                                                                    |   |                             |        |   |   |
| Cash  and cash equivalents - beginning                                                  |   | **994,296**                      |        | 2,387,178 |   |
|                                                                                    |   |                             |        |   |   |
| **Cash and cash equivalents - ending**                                                  |   | **$**                            | **870,570** |   | $ | 844,852 |   |

 

*TheAccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS JUNE 30, 2003 AND 2002

 

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

 

The condensed consolidated interim financial statements have beenprepared in accordance with the requirements of Regulation S-B and with theinstructions to Form 10-QSB. Accordingly, certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted.  In the opinion of management, all adjustments (consisting only ofnormal recurring accruals) necessary to present fairly the financial position,results of operations and cash flows have been included.  The results of operations for the six-monthperiod ended June 30, 2003 arenot necessarily indicative of the operating results to be expected for the yearending December 31, 2003.  Thesefinancial statements should be read in conjunction with the financialstatements and accompanying notes for the year ended December 31, 2002.

 

The balance sheet at December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

The financial statements include the accounts of Apogee Technology,Inc. (“Technology”), and its wholly owned inactive subsidiary, DUBLA, Inc.(collectively the “Company”).  Allsignificant intercompany transactions and accounts have been eliminated.

 

The Company is engaged in the development, design and marketing ofdigital amplifier technology and related sales of semi-conductor chips.  The Company is presently focused on computerbased audio and entertainment media applications derived from its all-digitalamplifier design trademarked as Direct Digital Amplification (DDX®).

 

**2.****                       ****Pro-formaInformation - Stock Options**

 

The Company has adopted only the disclosure provisions of FinancialAccounting Standard No. 123, “Accounting For Stock-Based Compensation” (FAS123).  It applies APB Opinion No. 25,“Accounting For Stock Issued To Employees”, and related interpretations inaccounting for its plan and does not recognize compensation expense for itsstock-based compensation plan other than for certain options granted in 2001.

 

The following table illustrates the effect on net income/(loss) andincome/(loss) per share if the Company had applied the fair value recognitionprovisions of FAS 123 to stock-based employee compensation.

 
|                            |                                                                                                                 | **Six Months  Ended  June 30,** |         |
|---------------------------------|----------------------------------------------------------------------------------------------------------------------|---------------------------------|--------------|
|                            |                                                                                                                 | **2003**                        |         | **2002** | ** ** |
|                            |                                                                                                                 |                            |         |   |   |
| Net income (loss), as  reported |                                                                                                                 | **$**                           | **102,195**  |   | $ | (978,929 | ) |
|                            |                                                                                                                 |                            |         |   |   |
| Deduct:                    | Total stock-based employee compensation expense  determined under fair value based method for all awards  ***** |                            | **(864,213** | **)** | (576,344 | ) |
|                            |                                                                                                                 |                            |         |   |   |
| Pro-forma net loss  ****** |                                                                                                                 | **$**                           | **(762,018** | **)** | $ | (1,555,273 | ) |
|                                 |                                                                                                                      |                                 |              |  |  |  |  |  |

 

6

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|                            |   | **Six Months  Ended  June 30,** |      |
|---------------------------------|--------|---------------------------------|-----------|
|                            |   | **2003**                        |      | **2002** | ** ** |
|                            |   |                            |      |   |   |
| Income (loss) per share:        |   |                            |      |   |   |
|                            |   |                            |      |   |   |
| As reported, basic and  diluted |   | **$**                           | **0.02**  |   | $ | (0.19 | ) |
|                            |   |                            |      |   |   |
| Pro-forma, basic and diluted    |   | **$**                           | **(0.15** | **)** | $ | (0.30 | ) |

 
|                            |                                                                                                                  | **Three  Months Ended  June 30,** |         |
|---------------------------------|-----------------------------------------------------------------------------------------------------------------------|-----------------------------------|--------------|
|                            |                                                                                                                  | **2003**                          |         | **2002** | ** ** |
|                            |                                                                                                                  |                              |         |   |   |
| Net income (loss), as  reported |                                                                                                                  | **$**                             | **241,531**  |   | $ | (209,932 | ) |
|                            |                                                                                                                  |                              |         |   |   |
| Deduct:                    | Total stock-based employee compensation expense determined  under fair value based method for all awards   ***** |                              | **(467,998** | **)** | (328,453 | ) |
|                            |                                                                                                                  |                              |         |   |   |
| Pro-forma net loss  ****** |                                                                                                                  | **$**                             | **(226,467** | **)** | $ | (538,385 | ) |
|                            |                                                                                                                  |                              |         |   |   |
| Income (loss) per share:        |                                                                                                                  |                              |         |   |   |
|                            |                                                                                                                  |                              |         |   |   |
| As reported, basic and  diluted |                                                                                                                  | **$**                             | **0.04**     |   | $ | (0.04 | ) |
|                            |                                                                                                                  |                              |         |   |   |
| Pro-forma, basic and diluted    |                                                                                                                  | **$**                             | **(0.04**    | **)** | $ | (0.11 | ) |
|                                 |                                                                                                                       |                                   |              |  |  |  |  |  |

 

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*******            **All awards refers toawards granted, modified, or settled in fiscal periods beginning after December15, 1994 - awards for which the fair value was required to be measured underFAS 123.

 

********     **For purposes ofpro-forma disclosures, the estimated fair value of the options is amortizedover the options’ vesting period. Pro-forma information regarding earnings and per share information isrequired by Statement 123, and has been determined as if the Company hadaccounted for its employee stock options under the fair value method of thatStatement.  The fair value of theseoptions was estimated at the date of grant using a Black-Scholes option pricingmodel for years subsequent to 2000. Prior to 2001, the fair value of the options were valued using theminimum value method.

 

7

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**3.****                       ****Inventories**

 

Inventories are stated at the lower of cost(first-in, first-out) or market.  Themajor classifications of inventories are as follows at period end:

 
|           |   | **June 30,  2003** |        | **December  31,  2002** |       |
|----------------|--------|--------------------|-------------|-------------------------|------------|
|           |   | **(Unaudited)**    |        |                    | ** ** |
|           |   |               |        |                    |       |
| Raw materials  |   | **$**              | **23,692**  |                    | $          | 33,441 |   |
| Finished goods |   | **810,194**        |        | 105,261                 |       |
|           |   |               |        |                    |       |
|           |   | **$**              | **833,886** |                    | $          | 138,702 |   |

 

**4.****                       ****BankLine of Credit**

 

On October 30, 2002, the Company obtained a $1million discretionary bank line-of-credit, which expires on August 31,2003.  Any borrowings under the line aredue on demand. Borrowings are limited to the lesser of $1 million or the sum of75% of eligible domestic accounts receivable and 80% of eligible foreignaccounts receivable.  The bank, at itsdiscretion, may make additional advances up to $500,000, exclusive of theformula, but may not exceed $1 million. The line is secured by the Company’s assets and has been personallyguaranteed by two of the Company’s officers/directors.  Interest is payable monthly at the bank’sbase rate plus one percent per annum. At June 30, 2003 borrowings outstanding under this line amounted to$400,000.

 

**5.****                       ****Stockholders’Equity**

 

***Stock Options***

 

The Company’s shareholders approved the Boardof Directors’ recommendation for an increase in the amount of common stock forissuance under the Company’s 1997 Incentive Stock Option Plan from 1,500,000shares to 2,050,000 shares during the quarter ended June 30, 2003.

 

During the three months ended June 30, 2003the Board of Directors awarded options to purchase 9,000 shares at exerciseprices ranging from $6.85 to $7.53, to certain employees.  These options were granted under the 1997Incentive Stock Option Plan.  Theoptions vest over five years beginning at the first anniversary of the date ofgrant.

 

***Other***

 

During the second quarter of 2003, 9,000shares of common stock were issued as a result of exercised stock options at anexercise price of $0.50 per share. The Company also issued 2,500 shares ofcommon stock as a result of exercised warrants during the quarter.  The exercise price was $2.50 per share.

 

In June 2003, the Company received $300,000for common stock that was issued in July 2003.

 

8

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**6****.****                       ****LicenseAgreement**

 

On February 7, 2001, the Company signed anexclusive license agreement with ST Microelectronics NV (“ST”) of theNetherlands.  The agreement calls for STto use certain intellectual property rights owned or controlled by the Companyto commercialize and sell related products utilizing such technology.  In consideration for this license, ST paidto the Company a one-time license fee of $1.6 million in cash and a $400,000credit for future design services.  TheCompany will also receive royalties based on certain formulas, as defined inthe agreement.  This agreement has noexpiration date, however, either party may cancel the agreement upon certainadvance notices as defined in the agreement. The $400,000 credit portion of the license fee is associated with futuredevelopment activities of the Company and will not be recognized in incomebefore that happens.  When the $400,000amount is recognized in income, it will simultaneously be charged to researchand development costs.

 

In prior years the Company recognized$220,000 of the credit for future design services.  During the quarter and six months ended June 30, 2003 the Companydid not recognize any such income.

 

**7.****                        Concentrations**

 

During the quarter and six months ended June30, 2003, approximately 84% and 79% of the Company’s product sales were derivedfrom four and three customers, respectively.

 

Four of the Company’s major customersaccounted for approximately 86% of the total accounts receivable balance at June 30, 2003.

 

Approximately 99% of the Company’s productsales for the quarter and six months ended June 30, 2003 were to customers inAsia.

 

The Company maintains accounts with financialinstitutions.  Balances usually exceedthe maximum coverage provided by the Federal Deposit Insurance Corporation oninsured depositor accounts.

 

Two major vendors accounted for approximately99% of the Company’s purchases for the quarter and six months ended June 30,2003.

 

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**ITEM 2****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

**GENERAL**

 

The following Management’sDiscussion and Analysis of the Company’s Financial Condition and Results ofOperations for the three- and six-month periods ended June 30, 2003 and June30, 2002 should be read in conjunction with the Company’s Financial Statementsand related Notes included elsewhere in this Quarterly Report on Form 10-QSB.This discussion contains, in addition to historical statements, forward-lookingstatements that involve risks and uncertainties. The Company’s actual resultscould differ significantly from the results discussed in the forward-lookingstatements. Factors that could cause or contribute to such differences includethe factors discussed in the section titled “Certain Risk Factors That MayAffect Future Results of Operations And Our Common Stock Price” as well asother factors described in the Company’s Annual Report on Form 10-KSB for theyear ended December 31, 2002. The Company does not intend to update any suchforward-looking statements.

 

**INTRODUCTION**

 

The Companydesigns, develops and markets semiconductor products or integrated circuits(ICs) incorporating the company’s patented Direct Digital Amplification (DDX®)technology. DDX-based IC products are used in a range of audio applicationsincluding:  home theater systems,powered speakers, car audio, commercial audio, and PC multi-media. Under alicensing agreement with STMicroelectronics NV (ST), the Company is developingand providing intellectual property to be used in royalty bearing productsproduced by ST.  In addition, theCompany is working under a development agreement with ST to develop and marketnew semiconductor products that leverage Apogee’s DDX technology and ST’sintellectual property and semiconductor design, development and manufacturingcapability**.**In 2003 the Companyinitiated the commercialization of proprietary power supply technology which itexpects to license and market as an integrated module. The Company markets itsproducts using a worldwide network of direct sales staff, independent salesrepresentatives and distributors. The Company generates revenue from the sale of DDX-based semiconductorchips and related products as well as royalties earned under the licensingagreement with ST signed in February 2001. The Company recorded a net profit ofapproximately $241,500 and $102,200 for the three and six months ended June 30,2003, as compared to a net loss of approximately $209,900 and $978,900 for thethree and six months ended June 30, 2002. The net profit for the three and sixmonths ended June 30, 2003 was the result of increased revenue from the salesof the Company’s semi-conductor products as well as increased royalties earned underthe ST licensing agreement.  As of June30, 2003, the Company had an accumulated deficit of approximately $11.1million, as compared to a deficit of approximately $11.2 million at December31, 2002. Of this accumulated deficit, approximately $4 million wasattributable to the Company’s now defunct loudspeaker business, which wasdiscontinued in 1994. The Company’s net losses and accumulated deficit (since1995) result primarily from research costs associated with the Company’sefforts to develop and market its DDX technology.

 

As of June 30, 2003, theCompany had 28 employees, up from 24 as of June 30, 2002.

 

During the three-monthperiod ended June 30, 2003, four customers represented, in the aggregate,approximately 84% of product revenue. The Company utilizes a network of sales representatives anddistributors, as well as a sales office in Hong Kong, to support the Company’sworldwide sales and marketing activities.

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following selected financial data for the three- and six-monthperiods ended June 30, 2003 and June 30, 2002 have been derived from theCompany’s financial statements.  Anytrends reflected by the following table may not be indicative of futureresults.

 
|                                        |   | **For the Three-Month Period****Ended  June 30,** |      | **For the Six-Month Period****EndedJune 30,** |   |
|---------------------------------------------|--------|---------------------------------------------------|-----------|-----------------------------------------------|--------|
|                                        |   | **2003**                                          |      | **2002**                                      |   | **2003** |   | **2002** |   |
| Statement of Operation Data:                |   |                                              |      |                                          |   |   |   |   |   |
| Revenue                                     |   | $                                                 | 3,032,627 |                                          | $      | 1,364,892 |   | $ | 4,872,219 |   | $ | 1,786,306 |   |
| Costs and expenses                          |   | 2,791,426                                         |      | 1,582,012                                     |   | 4,773,028 |   | 2,779,527 |   |
| Other Income (expenses)                     |   | 330                                               |      | 7,188                                         |   | 3,004 |   | 14,292 |   |
| Net Profit (Loss)                           |   | $                                                 | 241,531   |                                          | $      | (209,932 | ) | $ | 102,195 |   | $ | (978,929 | ) |
|                                        |   |                                              |      |                                          |   |   |   |   |   |
| Shares Outstanding                          |   | 5,393,085                                         |      | 5,242,251                                     |   | 5,393,085 |   | 5,242,251 |   |
|                                        |   |                                              |      |                                          |   |   |   |   |   |
| Balance Sheet Data:                         |   |                                              |      |                                          |   |   |   |   |   |
| Total Assets                                |   | $                                                 | 5,393,402 |                                          | $      | 2,805,537 |   | $ | 5,393,402 |   | $ | 2,805,537 |   |
| Stockholders’ equity                   |   | $                                                 | 2,631,900 |                                          | $      | 1,795,861 |   | $ | 2,631,900 |   | $ | 1,795,861 |   |
| Profit (Loss) per share (basic and diluted) |   | $                                                 | 0.04      |                                          | $      | (0.04 | ) | $ | 0.02 |   | $ | (0.19 | ) |

 

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**RESULTS OFCONTINUING OPERATIONS OF THE COMPANY**

 

The following table setsforth, for the periods indicated, the percentage of total revenue representedby certain revenue and expense items. The table and the discussion below should be read in conjunction withthe consolidated financial statements and notes thereto that appear elsewherein this report.

 
|                              |   | **For the  Three Months Ended  June 30,** |       | **For the  Six Months Ended  June 30,** |       |
|-----------------------------------|--------|-------------------------------------------|------------|-----------------------------------------|------------|
|                              |   | **2003**                                  |       | **2002**                                | ** ** | **2003** | ** ** | **2002** | ** ** |
|                              |   |                                      | ** ** |                                    | ** ** |   | ** ** |   | ** ** |
| Product Sales                     |   | 88.55                                     | %          | 77.62                                   | %          | 86.30 | % | 75.32 | % |
| Royalties                         |   | 11.45                                     |       | 20.44                                   |       | 13.70 |   | 22.45 |   |
| Consulting                        |   | 0.00                                      |       | 1.94                                    |       | 0.00 |   | 2.23 |   |
|                              |   |                                      |       |                                    |       |   |   |   |   |
| Cost of Sales                     |   | 61.49                                     |       | 51.70                                   |       | 60.20 |   | 51.41 |   |
| Research and Development          |   | 12.31                                     |       | 29.72                                   |       | 14.97 |   | 44.72 |   |
| Sales, General and Administrative |   | 18.25                                     |       | 34.49                                   |       | 22.79 |   | 59.48 |   |
|                              |   |                                      |       |                                    |       |   |   |   |   |
| Operating Profit (Loss)           |   | 7.95                                      | %          | (15.91                                  | )%         | 2.04 | % | (55.61 | )% |
|                              |   |                                      |       |                                    |       |   |   |   |   |
| Other Income (Expense)            |   | 0.01                                      |       | 0.53                                    |       | 0.06 |   | 0.80 |   |
| Net Profit (Loss)                 |   | 7.96                                      | %          | (15.38                                  | )%         | 2.10 | % | (54.81 | )% |

 

Revenue

 

The Company derives its revenuefrom three sources: (1) product sales, which consist of merchandise sales madeeither directly to manufacturers or to distributors, (2) royalty revenue, whichconsists of royalties paid by STMicroelectronics under the terms of thelicensing agreement signed in February 2001 and (3) consulting income.

 

Total revenue increased by approximately 122% or $1.6 million to $3.0million for the three months ended June 30, 2003 from $1.4 million for thethree months ended June 30, 2002.  Totalrevenue increased approximately 173% or $3.1 million for the six months endedJune 30, 2003 to $4.9 million up from $1.8 million for the same period in 2002.

 

Revenue from the sale of the Company’s products, consisting ofsemiconductor IC’s, as well as, DDX evaluation and reference boards, increasedby approximately 153% or $1.6 million to $2.7 million for the three monthsended June 30, 2003 from $1.1 million for the three months ended June 30, 2002and by approximately 213% or $2.9 million to $4.2 million for the six monthsended June 30, 2003 as compared to $1.3 million for the same period in 2002.This increase in product revenue was primarily due to growth in the sale of theCompany’s semiconductor products.

 

Revenue from non-product related items accounted for approximately 11%and 14% of total revenue for the three and six months ended June 30, 2003,respectively, compared to revenue for non-product related items ofapproximately 22% and 25% of total revenue for the same periods in 2002.  During the three months and six months endedJune 30, 2003, the Company recorded net royalty payments under the ST agreementof approximately $347,300 and $667,300, compared to royalty payments of$279,000 and $400,900 for the same periods in 2002, representing an increase ofapproximately 25% and 66% for the respective periods.

 

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Total Revenue for the Three and Six Months Ended June 30, 2003 and 2002consisted of:

 
|            |   | **For the  Three-Month Period  Ended June 30,** |      | **For the  Six-Month Period  Ended June 30,** |   |
|-----------------|--------|-------------------------------------------------|-----------|-----------------------------------------------|--------|
|            |   | **2003**                                        |      | **2002**                                      |   | **2003** |   | **2002** |   |
| Product Revenue |   | $                                               | 2,685,292 |                                          | $      | 1,059,451 |   | $ | 4,204,885 |   | $ | 1,345,501 |   |
| Royalties       |   | 347,335                                         |      | 278,969                                       |   | 667,334 |   | 400,934 |   |
| Consulting      |   | —                                          |      | 26,471                                        |   | — |   | 39,871 |   |
|            |   |                                            |      |                                          |   |   |   |   |   |
| Total:          |   | $                                               | 3,032,627 |                                          | $      | 1,364,891 |   | $ | 4,872,219 |   | $ | 1,786,306 |   |

 

Cost of Revenue

 

Cost of revenue wasapproximately $1.9 million and $3.0 million for the three and six months endedJune 30, 2003, respectively, compared to approximately $705,000 and $918,000for the same periods in 2002. Cost of revenue includes cost of purchasingfinished semiconductor chips as well as customs and storage fees.  This increase in the cost of revenue isprimarily attributable to costs relating to increased sales of the Company’ssemiconductor products, as well as the establishment of a warehousing facilityin Asia.  For the three and six monthsended June 30, 2003, the Company recorded a gross margin of approximately 31%and 30%, respectively, from product sales compared to a gross margin of 33% and32%, respectively, for the same periods in 2002.  The Company anticipates that the cost of revenue will continue toincrease in dollar amounts as the Company continues increasing its productsales, but to decline as a percentage of revenue.

 

Research and Development(“R&D”) Expenses

 

Research anddevelopment expenses consist primarily of salaries and related expenses in thedesign, development and technical support of the Company’s products as well asdirect support to current and potential customers in the development ofconsumer products utilizing DDX semiconductor products.  Research and development expensesdecreased to approximately $373,200 and $729,700 for the three months and sixmonths ended June 30, 2003, compared to approximately $405,600 and $798,800 forthe same periods in 2002.  This decreaseof approximately $32,400 or 8.0% and $69,100 or 8.7%, respectively, was relatedto the reduction in use of third party consultants.  Costs related to human resources for R & D increased toapproximately $345,400 and $675,200 from $312,000 and $618,500 for the threemonths and nine months ended June 30, 2003, an increase of approximately 10.7%and 9.2%, respectively.  The Companycontinues to invest in the development of its next generation IC’s, as well as,the continuation of support to both existing and potential customers.  Due to the technical nature of the Company’sproducts, engineering and design support are critical parts of the Company’sstrategy during both the development of its products and the support to itscustomers from product design to final production.  Management anticipates that it will continue to commit resourcesto research, development and design activities.  It expects these expenses to increase, but to decline as apercentage of revenue as revenue increases.

 

Selling, General and Administrative (“SG&A”) Expenses

 

Selling expenses consist primarily of salaries and related expenses forpersonnel engaged in the marketing and sales of the Company’s products, as wellas costs related to trade shows, product literature, travel and otherpromotional support costs. In addition, selling expenses include costs of itsHong Kong sales office, opened in April 2002. General and administrative costs consist primarily of executive andadministrative salaries, professional fees and other associated corporateexpenses. The change in SG & A, described below, was attributableprincipally to support the Company’s Hong Kong Office, increased human resourcecosts and commissions paid to distributors and representatives on increasedproduct revenue, offset by a decrease in professional fees, travel expenses andgeneral administrative costs.  SG&Aexpenses were approximately $553,500 and $1,110,400 for the three months andsix months ended June 30, 2003, compared to approximately $470,800 and$1,062,400 for the same periods in 2002, an increase of approximately $82,700or 17.6% and $48,000 or 4.5%, respectively. Human resource costs increased approximately $77,700 and $109,500 toapproximately $242,800 and $496,300 during the three months and six monthsended June 30, 2003 compared to $165,100 and $386,800 during the same period in2002, an increase of 47% and 28%, respectively.  This increase was primarily due to higher compensation, as wellas, an increase in staffing at the Hong Kong office.  At June 2003 the Hong Kong office employed five individuals, upfrom three employees at June 2002. Approximately $58,400 and $119,000 of the human resource expense for thethree and six months ended June 30, 2003 was related to staffing the Hong KongOffice.  This compared to approximately$30,300 and $30,300 for the same period in 2002.  Commissions on product sales increased $51,100 or 94% and $41,500or 64% to $105,700 and $106,300 for the three and six months ended June 30,2003, compared to $54,600 and $64,800 for the same periods in 2002.  As the Company expands its sales presencewith additional sales representatives worldwide, this number is expected tocontinue to increase.  Travel expensedecreased approximately 45% or $27,000 and 23% or 26,900 to $32,300 and $90,800for the three and six months ended June 30, 2003

 

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compared to $59,000 and $117,800 for the same period in 2002.  The Company believes that this decrease wasrelated to the SARS epidemic in Asia. With the SARS epidemic under control, it is anticipated that thesenumbers will increase in order to assist with new customer designs and supportof existing designs.  Professionalexpenses decreased approximately 43% or $36,000 and 51% or $129,100 to $46,900and $124,200 for the three and six months ended June 30, 2003 compared to$82,800 and $253,200 for the same periods in 2002.  For the three and six months June 30, 2003, combined legal andaccounting expenses decreased approximately 86% or $42,000 and 79% or $152,600,respectively, to $7,000 and $40,800 for the three and six months ended June 30,2003 from $49,100 and $193,400 for the same periods in 2002.  The Company expects that selling, generaland administrative expenses will increase in absolute dollars in future periodsas the Company expands its sales channels, marketing efforts and administrativeinfrastructure, but to decline as a percentage of revenue.

 

Interest Income (Expense)

 

Interest income, net of expense, includes income from the Company’scash and cash equivalents and from investments and expenses related to itsfinancing activities.  During the threeand six months ended June 30, 2003, the company generated net interest incomeof approximately $300 and $3,000 compared to net interest income ofapproximately $7,200 and $14,300 during the same periods in 2002.  The decrease in net interest income for thethree- and six-month periods ended June 30, 2003 was primarily due to use offunds and lower interest rates on cash and short-term investments.

 

Net Profit (Loss)

 

The Company reported a netprofit of approximately $241,500 or $.04 per basic and diluted common stock pershare for the three- month period ended June 30, 2003.  For the six months ended June 30, 2003, theCompany reported a net profit of approximately $102,200 or $.02 per basic anddiluted common share.  This compares toa loss of approximately $210,000 or $.04 per basic and diluted common share and$980,000 or $.19 per basic and diluted common share, respectively, for thethree- and six-month periods ended June 30, 2002.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s principalsource of liquidity at June 30, 2003 consisted of approximately $870,600 in cashand short-term investments and $400,000 in short-term financing.  This compares to approximately $994,300 incash and cash equivalents at December 31, 2002.  This decrease in cash was due to financing of the Company’s $3.3million in accounts receivable, inventory of $833,900 and working capitalrequirements.

 

Net cash used in operationsduring the six-month period ended June 30, 2003 was approximately $833,600compared to approximately $1,507,400 in the six-month period ended June 30,2002.  As of June 30, 2003, inventorywas approximately $833,900 compared to inventory of approximately $297,700 asof June 30, 2002.  Net accountsreceivable was approximately $3.3 million at June 30, 2003, up fromapproximately $1.4 million as of June 30, 2002.  This increase in accounts receivable was due to increasedshipments of the Company’s semiconductor products during the first two quartersof 2003.  As of June 30, 2003, fourmajor customers accounted for approximately 86% of the total accountsreceivable balance. The Company increased its reserve against bad debts to$35,000 as of June 30, 2003 from $25,000 as of December 31, 2002.  The Company believes this reserve issufficient at this time as a significant percentage of the Company’sreceivables are secured by letters of credit.

 

Net cash used in investingactivities for the six months ended June 30, 2003 was approximately $31,000,compared to approximately $50,000 for the six months ended June 30, 2002.

 

Net cash provided byfinancing activities for the six months ended June 30, 2003 was approximately$740,900, compared to $15,000 provided by financing activities for the sixmonths ended June 30, 2002.  During thethree-month period ended June 30, 2003, the Company received $6,250 net in cashfrom the exercise of warrants, $4,500 from the exercise of options by twoemployees and $300,000 as deposit for a private placement completed July 25,2003.  During the three-month periodended June 30, 2002, the Company received $20,000 in cash from the exercise ofwarrants and $4,852 from the exercise of options by two employees.  The Company believes that cash flow fromoperations and the amounts available under its working capital line of credit,obtained in October 2002, are sufficient to support operations and fund capitalequipment requirements over the next twelve months.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of the consolidated financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities and expenses.  On anon-going basis, the Company evaluates its estimates, including those related touncollectible accounts receivable, inventories, intangibles and otherlong-lived assets.  The Company basesits estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

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The Company believes the following critical accounting policies affectits more significant judgments and estimates used in the preparation of itsconsolidated financial statements.  TheCompany maintains allowances for uncollectible accounts receivable forestimated losses resulting from the inability of its customers to make requiredpayments.  If the financial condition ofthe Company’s customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required. TheCompany maintains allowances for estimated excess or obsolete inventories basedon the Company’s review of inventory levels, projected future sales andcomparison of actual manufacturing costs to standard costs.  If actual market conditions are lessfavorable than those projected by management, additional allowances may berequired. Property, plant and equipment, patents, trademarks and otherintangible assets are amortized over their estimated useful lives.  Useful lives are based on management’sestimates over the period that such assets will generate revenue. Intangibleassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable. Futureadverse changes in market conditions or poor operating results of underlyingcapital investments or intangible assets could result in losses or an inabilityto recover the carrying value of such assets, thereby possibly requiring animpairment charge in the future.

 

**CERTAIN RISK FACTORSTHAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND OUR COMMON STOCK PRICE.**

 

There are a number of important factors that could cause our actualresults to differ materially from those indicated or implied by forward-lookingstatements. Factors that could cause or contribute to such differences includethose discussed below, as well as those discussed elsewhere in this Form10-QSB. We disclaim any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise except as may be required by Law.

 

**RISKS RELATED TO OUR BUSINESS**

 

**WE HAVE HAD A HISTORYOF LOSSES AND MAY NOT BE ABLE TO SUSTAIN PROFITABILITY.**

 

As of June 30, 2003, we had an accumulated deficit of approximately$11.1 million. Of this amount, approximately $4 million was generated by theCompany’s former loudspeaker subsidiary, Apogee Acoustics, Inc., whichdiscontinued operations in 1994.  Werecorded a net profit of approximately $241,500 and $102,200 for the three- andsix-month periods ended June 30, 2003. The Company recorded net losses of $1,065,000 for the year endedDecember 31, 2002, $895,000 in 2001, $1.9 million in 2000 and $1.1 million in1999.  We may continue to incur netlosses and generate negative cash flow in the future.  We will need to continue to generate revenue to sustainprofitability and positive cash flow. Our ability to generate future revenue and sustain profitability willdepend on a number of factors, many of which are described throughout this riskfactor section.  If we are unable tomaintain profitability, our share price would likely decline.

 

**THE COMPANY HAS ONLY A SMALL NUMBER OFCUSTOMERS, AND THE LOSS OF THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECTON THE COMPANY’S BUSINESS.**

 

During the six months ended June 30, 2003, the Company derivedapproximately 79% of its product revenues from three customers.  The loss of any of the company’s customerswould have a material adverse effect on the Company’s business, financialcondition and results of operations. The Company intends to diversify its customer base in the coming monthsin order to reduce its dependence on a small number of customers.  The Company may not be able to succeed inthese efforts.

 

**OUR BUSINESS IS CONCENTRATED IN A LIMITEDNUMBER OF MARKETS AND ANY SIGNIFICANT CHANGE IN THESE MARKETS COULD HAVE AMATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

Approximately 99% of the Company’s product sales for the six monthsended June 30, 2003 were to customers in Asia. The recent outbreak of Severe Acute Respiratory Syndrome (SARS) has hadan adverse effect on our sales in this region and it may continue to do sounless the outbreak remains under control. In addition, a significantpercentage of the Company’s product sales are to manufacturers producing DVDReceivers, the largest consumer product ever. This is a new consumer electronic product with a limited saleshistory.  The Company intends to developnew markets in order to diversify the market applications of its products.

 

**OUR MARKETS ARE SUBJECT TO RAPIDTECHNOLOGICAL CHANGE AND, THEREFORE, OUR SUCCESS DEPENDS ON OUR ABILITY TOINTRODUCE NEW PRODUCTS IN A TIMELY FASHION.**

 

The life cycle of the technology and any future products developed byus may be limited by the emergence of new products and technologies, changes inconsumer preferences and other factors. Our future performance will depend on our ability to consistently:

 

•  identify emerging technological trends inour market

 

•  identify changing consumer requirements

 

•  develop or maintain competitive technology,including new product offerings

 

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•  improve the performance, features andreliability of our products, particularly in response to technological changeand competitive offerings

 

•  bring technology to market quickly atcost-effective prices, and

 

•  protect our intellectual property.

 

There can be no assurance that we will be successful in developing andmarketing new products that respond to technological and competitivedevelopments and changing customer needs, or that such products will gainmarket acceptance and be incorporated into the technology or products of thirdparties.  Any significant delay orfailure to develop new enhanced technologies, including new product offerings,and any failure of the marketplace to accept any new technology and productofferings would have a material adverse effect on our business, financialcondition and results of operations.

 

**WE MAY REQUIRE ADDITIONAL CAPITAL TO FUND OUROPERATIONS AND RESEARCH AND DEVELOPMENT.**

 

Because we have historically had losses and only a limited amount ofcash has been generated from operations, we have funded our operatingactivities to date primarily from the sale of securities.  We will likely require additional capital inthe future, which may be in the form of additional sales of securities.  The additional capital may not be readilyavailable to us on favorable terms, if at all. The sale of securities will result in dilution to our currentstockholders’ ownership in the Company.

 

**OUR ABILITY TO ACHIEVE SUSTAINED REVENUEGROWTH WILL BE HARMED IF WE ARE UNABLE TO MAINTAIN OUR EXISTING LICENSINGRELATIONSHIPS.**

 

Part of our business strategy is to expand our licensing activitieswith ST and to enter into licensing relationships with other companies in orderto offer products to a larger customer base than could be reached through ourown development and marketing efforts. We believe that such relationships can accelerate market penetration ofour products and technologies, while limiting our manufacturing exposure andsales and marketing costs.  However,there can be no assurance that we will be able to expand or maintain ourexisting licensing relationships or establish new licensing relationships oncommercially reasonable terms, if at all. Any future inability by us to maintain our licensing relationships or toenter into additional licensing relationships, or the failure of one or more ofour licensing relationships to contribute to the development and maintenance ofa market for our products, could have a material adverse effect on ourbusiness, operating results and financial condition.

 

**OUR QUARTERLY OPERATING RESULTS MAYFLUCTUATE.**

 

We have experienced fluctuations in our quarterly operating results inthe past and it is likely that these fluctuations will continue in thefuture.  These fluctuations are causedby many factors, including, but not limited to:

 

•  availability and pricing from our suppliers;

 

•  changes in the demand for our products bycustomers;

 

•  introductions or enhancements of products,or delays in the introductions or enhancements of products, by us or ourcompetitors;

 

•  rate and success of new customerdevelopment;

 

•  changes in our pricing policies or those ofour competitors;

 

•  success in attracting, retaining andmotivating qualified personnel; and

 

•  changes in general economic conditions.

 

A substantial portion of our operating expenses is related topersonnel, facilities, and sales and marketing programs and are fixed.  Our expense level is based in part on ourexpectations of future orders and sales, which are extremely difficult topredict.  Accordingly, we may not beable to adjust our fixed expenses quickly enough to address any significantshortfall in demand for our products in relation to our expectations.

 

Fluctuations in our operating results may also result in fluctuationsin our common stock price.  In suchevent, the trading price of our common stock would likely suffer and adverselyaffect our ability to raise capital and the value of your investment in theCompany.

 

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**IF WE ARE UNABLE TO HIRE OR RETAIN KEYPERSONNEL, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY.**

 

We may not be successful in recruiting and retaining executive officersand other key management and technical personnel.  The competition for employees with the necessary high level oftechnical expertise to design and market our products is intense, particularlyin eastern Massachusetts.  We will needto hire a number of additional technical personnel if we are to increase therate at which we develop new products. Because competition for highly skilled technical personnel is sointense, companies in Apogee’s industry are subject from time to time tocomplaints brought by competitors alleging interference with contractualrelations or wrongful hiring of employees. Such lawsuits may be costly, may divert management attention andresources from the operation of our business, and may therefore adverselyaffect our financial condition and results of operations.  In addition, the loss of the management andtechnical expertise of our senior management could seriously harm us.

 

**WE DO NOT HAVEMANUFACTURING CAPABILITIES, AND AS A RESULT, WE RELY ON OUTSIDE FOUNDRIES TOMANUFACTURE OUR SEMICONDUCTOR PRODUCTS.**

 

We have no manufacturing capabilities, nor do we have plans toestablish any such capabilities. Accordingly, we utilize outside semiconductor foundries to manufactureour semiconductor products.  There aresignificant risks associated with our reliance on these foundries that canadversely affect our business, operating results and financial condition.  These risks include:

 

•  the ability to maintain foundryrelationships, the failure of which could result in significant delays inproduct introduction due to the time necessary to establish new relationships

 

•  the loss of foundry priority that may resultin limiting our ability to obtain products on schedule

 

•  limited control over product quality thatcould result in product returns and the loss of customers

 

•  inability to control manufacturing yieldthat could increase production costs, thereby reducing sales potential andoperating margins, and

 

•  lack of access or control over new processand manufacturing technologies to maintain product competitiveness in the market.

 

**OUR PRODUCTS USE NEW TECHNOLOGY AND MAY HAVEMANUFACTURING DEFECTS OR OTHER CHARACTERISTICS THAT ARE ONLY DETECTED AFTERINSTALLATION IN CUSTOMER APPLICATIONS, WHICH MAY HARM OUR BUSINESS.**

 

Our products are based on recently developed technology and aremanufactured using state-of-the-art manufacturing processes.  Our approach to product qualification andtesting may not fully evaluate or identify product characteristics or defectsthat could adversely affect the product’s ability to operate in the intendedapplication.  If such defects orcharacteristics are discovered after installation, product revenue might besignificantly delayed and our ability to maintain existing customers and toretain new customers may be seriously affected.

 

**OUR ABILITY TO ACHIEVE REVENUE GROWTH WILL BEHARMED IF WE ARE UNABLE TO PERSUADE THE MARKET TO ADOPT OUR NEW AMPLIFIERTECHNOLOGY.**

 

We face challenges in persuading manufacturers to adopt our productsusing our new DDX amplifier technology. Traditional amplifiers use design approaches developed in the1930s.  These approaches are still usedin most amplifiers and engineers are familiar with these designapproaches.  In order to adopt our products,manufacturers and engineers must understand and accept our new technology.  In addition, our amplifier technology may bemore expensive for some applications than the traditional amplifiertechnology.  For these reasons,prospective customers may be reluctant to adopt our technology.

 

**INTENSE COMPETITION IN THE SEMICONDUCTOR ANDCONSUMER AUDIO INDUSTRY COULD PREVENT US FROM ACHIEVING OR SUSTAININGPROFITABILITY.**

 

The semiconductor and consumer audio industry is highly competitive,and we expect the intensity of the competition to increase. Many of ourcompetitors have greater financial, technical, research, marketing, sales,distribution, service and other resources than we do.  Moreover, our competitors may offer broader product lines andhave greater name recognition than we do, and may offer discounts as acompetitive tactic.  In addition,several development stage companies are currently creating or developingtechnologies and products that compete with or are being designed to competewith our technologies and products.  Ourcompetitors may develop or market technologies or products that are moreeffective or more commercially attractive than our current or future products,or that may render our technologies or products less competitive orobsolete.  Accordingly, if competitorsintroduce superior technologies or products and we cannot make enhancements toour technologies and products necessary for them to remain competitive, ourcompetitive position, and in turn, our business, revenues and financialcondition, will be seriously harmed.

 

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**RISKS RELATED TO OUR INTELLECTUAL PROPERTY**

 

**OUR INTELLECTUAL PROPERTY AND PROPRIETARYRIGHTS MAY BE INSUFFICIENT TO PROTECT OUR COMPETITIVE POSITION.**

 

Our business depends, in part, on our ability to protect ourintellectual property.  We relyprimarily on patent, copyright, trademark and trade secret laws to protect ourproprietary technologies.  We cannot besure that such measures will provide meaningful protection for our proprietarytechnologies and processes.  We have twoissued United States patents and two pending patent applications.  We cannot be sure that any existing orfuture patents will not be challenged, invalidated or circumvented, or that anyright granted thereunder would provide us meaningful protection. The failure ofany patents to provide protection to our technology would make it easier forour competitors to offer similar products.

 

We also generally enter into confidentiality agreements with ouremployees and strategic partners, and generally control access to and distributionof our documentation and other proprietary information.  Despite these precautions, it may bepossible for a third party to copy or otherwise obtain and use our products ortechnology without authorization, develop similar technology independently ordesign around our patents.  In addition,effective copyright, trademark and trade secret protection may be unavailableor limited in certain foreign countries.

 

**WE MAY BE SUBJECT TO INTELLECTUAL PROPERTYRIGHTS DISPUTES WHICH COULD DIVERT MANAGEMENT’S ATTENTION AND COULD BE COSTLY.**

 

The semiconductor and consumer audio industries are characterized byvigorous protection and pursuit of intellectual property rights. From time totime, we may receive notices of claims of infringement, misappropriation or misuseof other parties’ proprietary rights. We cannot be sure that we will prevail inthese actions, or that other actions alleging infringement by us of third-partypatents, misappropriation or misuse by us of third-party trade secrets or theinvalidity of one or more patents held by us will not be asserted or prosecutedagainst us, or that any assertions of infringement, misappropriation or misuseor prosecutions seeking to establish the invalidity of our patents will notseriously harm our business.  For example,in a patent or trade secret action, an injunction could be issued against usrequiring that we withdraw particular products from the market or necessitatingthat specific products offered for sale or under development be redesigned.

 

Irrespective of the validity or successful assertion of various claimsof infringement, misappropriation or misuse of other parties’ proprietaryrights, we would likely incur significant costs and diversion of our managementand personnel resources with respect to the defense of such claims, which couldseriously harm our business.  If anyclaims or actions are asserted against us, we may seek to obtain a licenseunder a third party’s intellectual property rights.  We cannot be sure that under such circumstances a license wouldbe available on commercially reasonable terms, if at all.  Moreover, we often incorporate theintellectual property of our strategic customers into our designs, and we havecertain obligations with respect to the non-use and non- disclosure of suchintellectual property.  We cannot besure that the steps taken by us to prevent our, or our customers’,misappropriation or infringement of the intellectual property will besuccessful.

 

**RISKS RELATING TO OUR COMMON STOCK**

 

**FACTORS UNRELATED TO OUR BUSINESS COULDNEGATIVELY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.**

 

The stock markets have experienced extreme price and volumefluctuations that have affected and continue to affect the market prices ofequity securities of many technology companies.  These fluctuations often have been unrelated or disproportionateto the operating performance of those companies.  We expect that the market price of our Common Stock willfluctuate as a result of variations in our quarterly operating results, or forother reasons that are not related to the performance of our business.  These fluctuations may be exaggerated if thetrading volume of our Common Stock is low. In addition, due to the technology-intensive nature of our business, themarket price for our Common Stock may rise and fall in response to variousfactors including:

 

•  announcements of technological innovationsor new products, or competitive developments;

 

•  investor perceptions and expectationsregarding our or our competitors’ products;

 

•  acquisitionsor strategicalliances by us or our competitors; and

 

•  the gain or loss of a significant customeror order.

 

In addition, market fluctuations, as well as general economic,political and market conditions such as recessions, interest rate changes orinternational currency fluctuations, may negatively impact the market price ofour Common Stock.

 

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**BECAUSE A LIMITED NUMBER OF PERSONS,INCLUDING DIRECTORS AND EXECUTIVE OFFICERS, OWN A SUBSTANTIAL PERCENTAGE OF OURCOMMON STOCK, SUCH PERSONS WILL BE ABLE TO INFLUENCE CORPORATE DECISIONS IN AWAY THAT MAY BE DETRIMENTAL TO OTHER STOCKHOLDERS.**

 

As of June 30, 2003 our executive officers and directors ownedapproximately forty-five percent (45.83%) of the outstanding shares of CommonStock of the Company.  Accordingly, suchpersons have sufficient voting power to substantially influence the outcome ofmatters that are put to a stockholder vote, including the election of a majorityof the board of directors, and any merger, consolidation or sale of all orsubstantially all of our assets, and also have control over our management andaffairs.  As a result of such votingpower, these stockholders will be able to influence the outcome of corporateactions, including proxy contests, mergers involving us, tender offers, openmarket purchase programs or other purchases of Common Stock that could give ourstockholders the opportunity to realize a premium over the then prevailingmarket price for their shares of Common Stock. This concentration of ownership could also adversely affect our stock’smarket price.

 

**ITEM 3****– QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

The Company’s financial instruments include: cash, cash equivalents,accounts receivable and accounts payable. At June 30, 2003, the carrying value of the Company’s cash, cashequivalents, accounts receivable and accounts payable approximate fair valuesgiven the short maturity of these instruments.

 

Although the Company’s sales are predominately to internationalmarkets, the Company believes that it does not have material foreign currencyexchange rate risk since international sales are in U.S. dollars and materialpurchases from foreign suppliers are typically also denominated in U.S.dollars.  Additionally, the functionalcurrency of the Company’s foreign sales office is the U.S. dollar.

 

It is the Company’s policy not to enter into derivative financialinstruments for speculative purposes.

 

**ITEM 4****– CONTROLS AND PROCEDURES**

 

(a)          Evaluation of DisclosureControls and Procedures.  The Company’schief executive officer and principal financial officer have reviewed andevaluated the effectiveness of the Company’s disclosure controls and procedures(as defined in Exchange Act Rules 13-15 (e) and 15d-15 (e)) as of the end ofthe period covered by this quarterly report. Based on that evaluation, the chief executive officer and principalfinancial officer have concluded that the Company’s current disclosure controlsand procedures are adequate and effective to ensure that material informationrelating to the Company was made known to them by others, particularly duringthe period in which this Quarterly Report on Form 10-QSB was being prepared.

 

(b)         Changes in InternalControls.  There were no changes in ourinternal control over financial reporting, identified in connection with theevaluation of such internal control that occurred during our last fiscalquarter, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

 

**PARTII****- OTHERINFORMATION**

 

**ITEM 1****- LEGAL PROCEEDINGS**

 

None.

 

**ITEM 2****- CHANGES IN SECURITIES**

 

On May 1, 2003, 4,000 sharesof the Company’s Common Stock were issued to an employee as a result of theexercise of certain options pursuant to the Company’s 1997 Employee, Directorand Consultant Stock Option Plan (the “Plan”). The exercise price for these shares was $.50 per share.

 

On May 13, 2003, 5,000shares of the Company’s Common Stock were issued to an employee as a result ofthe exercise of certain options pursuant to the Company’s plan.  The exercise price for these shares was $.50per share.

 

On June 25, 2003, 2,500shares of the Company’s Common Stock were issued to an investor as a result ofthe exercise of warrants issued pursuant to a Stock Subscription Agreement in aprivate placement dated January 25, 2000. The exercise price for these shares was $2.50 per share.  The exemption from registration relied uponwas Section 4(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”).

 

On May 27, 2003, the Company granted options to an employee to purchaseup to 5,000 shares each of the Company’s Common Stock at an exercise price of$6.85 per share under plan.

 

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On June 9, 2003, the Company granted options to an employee to purchaseup to 4,000 shares of the Company’s Common Stock at an exercise price of $7.53per share, under the Plan.

 

**ITEM 3****- DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4****- SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

The Annual Meeting ofShareholders of the Company was held on May 27, 2003.  The following matters were voted upon:

 

(1)          Ms. Sheryl B. Stein was elected by more thana plurality of the shares entitled to vote at the meeting to serve as aDirector of the Company to hold office until the annual meeting of theCorporation in 2006.  This proposal wasapproved with 4,450,529 votes for the proposal, 322,600 votes against theproposal and no abstentions.

 

(2)          The shareholders approved an increase in theaggregate number of shares for which stock options may be granted under thePlan from 1,550,000 to 2,050,000 shares. This proposal was approved with 3,131,181 votes for the proposal, 346,755votes against the proposal, no abstentions and 1,295,193 broker non-votes.

 

(3)          The shareholders ratified the appointment ofYohalem Gillman & Company, LLP as the independent public accountants forthe Company.  This proposal was approvedwith 4,754,729 votes for the proposal, 5,200 votes against the proposal, and13,200 abstentions and no broker non-votes.

 

Following the annual meeting, the Company’s Board of Directorsconsisted of:  Ms. Sheryl B. Stein, Mr.Herbert M. Stein, Mr. David Spiegel and Mr. Alan W. Tuck.

 

**ITEM 5****- OTHER INFORMATION**

 

None.

 

**ITEM 6****- EXHIBITS AND REPORTS ONFORM 8-K**

 

(a)             Exhibits:

 

SeeExhibit Index

 

(b)            Reports on Form 8-K:

 

On June 10, 2003, the company furnished a current report on Form 8-K,under Item 9 of that form, reporting the filing of a complaint against OrangeInvestments, Ltd. and Jay Gregg.

 

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**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                  | **APOGEE  TECHNOLOGY, INC.**                                                           |
|-----------------------|----------------------------------------------------------------------------------------|
|                  |                                                                                   |
|                  |                                                                                   |
| Date: August 14, 2003 | By: /s/                                                                                | Herbert M. Stein |   |
|                  | Name:  Herbert M. Stein                                                           |
|                  | Title: Chairman of the  Board, President and Chief Executive Officer                   |
|                  |                                                                                   |
|                  |                                                                                   |
| Date: August 14, 2003 | By: /s/                                                                                | David Spiegel |   |
|                  | Name:  David Spiegel                                                              |
|                  | Title:  Treasurer (principal financial  officer and principal accounting officer) |

 

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FORM-10QSBJUNE 30, 2003

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                      |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                 |
| 31.1                |   | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  by Chief Executive Officer and Principal Financial Officer Regarding Facts  and Circumstances Relating to Exchange Act Filings. |
|                |   |                                                                                                                                                                                                 |
| 31.2                |   | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  by Chief Executive Officer and Principal Financial Officer Regarding Facts  and Circumstances Relating to Exchange Act Filings. |
|                |   |                                                                                                                                                                                                 |
| 32                  |   | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  by Chief Executive Officer and Principal Financial Officer Regarding Facts  and Circumstances Relating to Exchange Act Filings. |

 

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