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

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2004**

 

**o****  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition 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**

(Addressof principal executive offices)

 

**(781) 551-9450**

(Issuer’stelephone number, including area code)

 

**NOT APPLICABLE.**

(Formername, 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

 

Statethe number of shares of each of the Issuer’s classes of common equity, as ofthe latest practicable date:  As ofAugust 5, 2004, there were 11,402,090 shares of Common Stock, $.01 par valueper 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-QSB FOR THE**

**QUARTER ENDED JUNE 30, 2004**

 
| **PART I-FINANCIAL INFORMATION**                                                                     |                                                                                                                                          |
|------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                           |                                                                                                                                          |
| Item 1 - Financial  Statements (Unaudited)                                                           |                                                                                                                                          |
|                                                                                                 | Condensed  Consolidated Balance Sheets at June 30, 2004 and December 31, 2003.                                                                |   |
|                                                                                                 |                                                                                                                                          |   |
|                                                                                                 | Condensed  Consolidated Statements of Operations and Accumulated Deficit for the Three  and Six Months Ended June 30, 2004 and June 30, 2003. |   |
|                                                                                                 |                                                                                                                                          |   |
|                                                                                                 | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004  and June 30, 2003.                                   |   |
|                                                                                                 |                                                                                                                                          |   |
|                                                                                                 | Notes  to Condensed Consolidated Financial Statements.                                                                                        |   |
|                                                                                                 |                                                                                                                                          |   |
| Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                                                                          |
|                                                                                                 |                                                                                                                                          |
| 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 Issuer  Purchases of Equity Securities                            |                                                                                                                                          |
|                                                                                                 |                                                                                                                                          |
| 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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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                    | ** ** | **June 30,  2004** | ** **    | **DECEMBER 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|---------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(Unaudited)**    | ** **    | ** **             | ** ** |
| **ASSETS**                                                                                                                                    |       |               |          |                   |       |
|                                                                                                                                          |       |               |          |                   |       |
| **Current assets**                                                                                                                            |       |               |          |                   |       |
| Cash and cash equivalents                                                                                                                     |       | **$**              | **1,692,644** | ** **             | $          | 2,524,209 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $55,000 in 2004 and $45,000 in 2003                                           |       | **2,636,606**      | ** **    | 3,522,406              |       |
| Inventories                                                                                                                                   |       | **937,524**        | ** **    | 723,944                |       |
| Prepaid expenses and other current assets                                                                                                     |       | **257,387**        | ** **    | 180,261                |       |
| Deferred tax asset                                                                                                                            |       | **195,000**        | ** **    | 195,000                |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| Total current assets                                                                                                                          |       | **5,719,161**      | ** **    | 7,145,820              |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| **Property and equipment, net of accumulated  depreciation of $429,638 in 2004 and $391,463 in 2003**                                         |       | **121,270**        | ** **    | 128,831                |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| **Other assets**                                                                                                                              |       | ** **         | ** **    |                   |       |
| Digital amplifier patents, net of  accumulated amortization of $114,488 in 2004 and $103,856 in 2003                                          |       | **106,466**        | ** **    | 87,369                 |       |
| Other intangible assets                                                                                                                       |       | **173,223**        | ** **    | 36,667                 |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
|                                                                                                                                          |       | **$**              | **6,120,120** | ** **             | $          | 7,398,687 |   |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                 |       | ** **         | ** **    |                   |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| **Current liabilities**                                                                                                                       |       | ** **         | ** **    |                   |       |
| Accounts payable and accrued expenses                                                                                                         |       | **$**              | **710,000**   | ** **             | $          | 1,528,590 |   |
| Current maturities of capital lease  obligations                                                                                              |       | **—**         | ** **    | 3,318                  |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| Total current liabilities                                                                                                                     |       | **710,000**        | ** **    | 1,531,908              |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| **Stockholders’ equity**                                                                                                                 |       | ** **         | ** **    |                   |       |
| Common stock, $.01 par value;  20,000,000 shares authorized, 11,400,770 and 11,327,270 issued and  outstanding in 2004 and 2003, respectively |       | **114,008**        | ** **    | 113,272                |       |
| Additional paid-in capital                                                                                                                    |       | **16,402,734**     | ** **    | 16,171,611             |       |
| Accumulated deficit                                                                                                                           |       | **(11,106,622**    | **)**         | (10,418,104            | )          |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
| Total stockholders’ equity                                                                                                               |       | **5,410,120**      | ** **    | 5,866,779              |       |
|                                                                                                                                          |       | ** **         | ** **    |                   |       |
|                                                                                                                                          |       | **$**              | **6,120,120** | ** **             | $          | 7,398,687 |   |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

3

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT

 
| ** **                                                          | ** ** | **THREE MONTHS ENDED  June 30,** |            | **SIX MONTHS ENDED  June 30,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|-----------------|--------------------------------|------------|
| ** **                                                          | ** ** | **2004**                         | ** **      | **2003**                       |       | **2004** | ** ** | **2003** | ** ** |
| **Revenues**                                                        |       |                             | ** **      |                           |       |   | ** ** |   |   |
| Product sales                                                       | ** ** | **$**                            | **1,036,397**   | ** **                     | $          | 2,685,292 |   | **$** | **2,733,088** | ** ** | $ | 4,204,885 |   |
| Royalties                                                           | ** ** | **435,864**                      | ** **      | 347,335                        |       | **811,012** | ** ** | 667,334 |   |
| Consulting                                                          | ** ** | **200,000**                      | ** **      | —                         |       | **454,484** | ** ** | — |   |
| ** **                                                          |       | **1,672,261**                    | ** **      | 3,032,627                      |       | **3,998,584** | ** ** | 4,872,219 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| **Costs and expenses**                                              |       |                             | ** **      |                           |       |   | ** ** |   |   |
| Product sales                                                       | ** ** | **626,159**                      | ** **      | 1,864,686                      |       | **1,740,513** | ** ** | 2,932,927 |   |
| Research and development                                            | ** ** | **606,198**                      | ** **      | 379,041                        |       | **1,317,667** | ** ** | 735,521 |   |
| Selling, general and administrative                                 | ** ** | **820,965**                      | ** **      | 547,699                        |       | **1,639,806** | ** ** | 1,104,580 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| ** **                                                          |       | **2,053,322**                    | ** **      | 2,791,426                      |       | **4,697,986** | ** ** | 4,773,028 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| **Operating (loss) income**                                         | ** ** | **(381,061**                     | **)**           | 241,201                        |       | **(699,402** | **)** | 99,191 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| **Other (expense) income**                                          |       |                             | ** **      |                           |       |   | ** ** |   |   |
| Interest expense                                                    | ** ** | **(28**                          | **)**           | (1,350                         | )          | **(93** | **)** | (1,849 | ) |
| Interest income                                                     | ** ** | **5,662**                        | ** **      | 1,680                          |       | **10,977** | ** ** | 4,853 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| ** **                                                          |       | **5,634**                        | ** **      | 330                            |       | **10,884** | ** ** | 3,004 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| **Net (loss) income**                                               | ** ** | **(375,427**                     | **)**           | 241,531                        |       | **(688,518** | **)** | 102,195 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| Accumulated deficit - beginning                                     | ** ** | **(10,731,195**                  | **)**           | (11,314,013                    | )          | **(10,418,104** | **)** | (11,174,677 | ) |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| **Accumulated deficit - ending**                                    | ** ** | **$**                            | **(11,106,622** | **)**                          | $          | (11,072,482 | ) | **$** | **(11,106,622** | **)** | $ | (11,072,482 | ) |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| **Basic and diluted (loss) income per common  share**               | ** ** | **$**                            | **(0.03**       | **)**                          | $          | 0.02 |   | **$** | **(0.06** | **)** | $ | 0.01 |   |
|                                                                |       |                             | ** **      |                           |       |   | ** ** |   |   |
| **Weighted average common shares outstanding  - basic and diluted** | ** ** | **11,380,790**                   | ** **      | 10,752,246                     |       | **11,359,469** | ** ** | 10,762,176 |   |

* *

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

4

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                              | ** ** | **SIX MONTHS ENDED  June 30,** | ** **    |
|-----------------------------------------------------------------------------------------|------------|--------------------------------|---------------|
| ** **                                                                              | ** ** | **2004**                       | ** **    | **2003** | ** ** |
| **Cash flows from operations**                                                          |       |                           | ** **    |   |   |
| Net (loss) income                                                                       | ** ** | **$**                          | **(688,518**  | **)** | $ | 102,195 |   |
| *Adjustments to reconcile net (loss) income  to net cash used in operating activities:* |       |                           | ** **    |   |   |
| Provision for doubtful accounts                                                         | ** ** | **10,000**                     | ** **    | 10,000 |   |
| Depreciation and amortization                                                           | ** ** | **48,807**                     | ** **    | 44,282 |   |
| *Changes in operating assets and  liabilities:*                                         |       |                           | ** **    |   |   |
| Accounts receivable                                                                     | ** ** | **875,800**                    | ** **    | (1,286,990 | ) |
| Inventories                                                                             | ** ** | **(213,580**                   | **)**         | (695,184 | ) |
| Prepaid expenses and other current assets                                               | ** ** | **(77,126**                    | **)**         | (59,359 | ) |
| Accounts payable and accrued expenses                                                   | ** ** | **(818,590**                   | **)**         | 1,051,502 |   |
|                                                                                    |       |                           | ** **    |   |   |
| Net cash used in operating activities                                                   | ** ** | **(863,207**                   | **)**         | (833,554 | ) |
|                                                                                    |       |                           | ** **    |   |   |
| **Cash flows from investing activities**                                                |       |                           | ** **    |   |   |
| Purchases of property and equipment                                                     | ** ** | **(30,614**                    | **)**         | (24,263 | ) |
| Patent costs                                                                            | ** ** | **(29,729**                    | **)**         | (6,764 | ) |
| Other intangible assets                                                                 | ** ** | **(136,556**                   | **)**         | —.— |   |
|                                                                                    |       |                           | ** **    |   |   |
| Net cash used in investing activities                                                   | ** ** | **(196,899**                   | **)**         | (31,027 | ) |
|                                                                                    |       |                           | ** **    |   |   |
| **Cash flows from financing activities**                                                |       |                           | ** **    |   |   |
| Proceeds from issuances of common stock                                                 | ** ** | **231,859**                    | ** **    | 50,750 |   |
| Deposit for common stock to be issued                                                   | ** ** | **—**                     | ** **    | 300,000 |   |
| Proceeds from bank line of credit                                                       | ** ** | **—**                     | ** **    | 400,000 |   |
| Repayment of capital lease obligations                                                  | ** ** | **(3,318**                     | **)**         | (9,895 | ) |
|                                                                                    |       |                           | ** **    |   |   |
| Net cash provided by financing activities                                               | ** ** | **228,541**                    | ** **    | 740,855 |   |
|                                                                                    |       |                           | ** **    |   |   |
| **Decrease in cash and cash equivalents**                                               | ** ** | **(831,565**                   | **)**         | (123,726 | ) |
|                                                                                    |       |                           | ** **    |   |   |
| Cash and cash equivalents - beginning                                                   | ** ** | **2,524,209**                  | ** **    | 994,296 |   |
|                                                                                    |       |                           | ** **    |   |   |
| **Cash and cash equivalents - ending**                                                  | ** ** | **$**                          | **1,692,644** | ** ** | $ | 870,570 |   |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

5

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

 

1.             Basis of Presentation

 

Thecondensed consolidated interim financial statements have been prepared inaccordance with the requirements of Regulation S-B and with the instructions toForm 10-QSB.  Accordingly, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals)necessary to present fairly the financial position, results of operations andcash flows have been included.  The resultsof operations for the six month period ended June 30, 2004 are not necessarilyindicative of the operating results to be expected for the year ending December31, 2004.  These financial statementsshould be read in conjunction with the financial statements and accompanyingnotes for the year ended December 31, 2003.

 

Thebalance sheet at December 31, 2003 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.

 

Thefinancial statements include the accounts of Apogee Technology, Inc., and itswholly owned inactive subsidiary, DUBLA, Inc. (collectively the“Company”).  All significant intercompanytransactions and accounts have been eliminated.

 

TheCompany is engaged in the development, design and marketing of digitalamplifier 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-forma Information - StockOptions

 

TheCompany has adopted the disclosure-only provisions of Financial AccountingStandard No. 123, “Accounting For Stock-Based Compensation” (FAS 123).  It applies APB Opinion No. 25, “Accounting For Stock Issued To Employees”, and related interpretationsin accounting for its stock option plan and does not recognize compensationexpense for its stock-based compensation plan other than for certain optionsgranted in 2001.

 

Thefollowing tables illustrate the effect on net (loss)/ income and (loss)/ incomeper share if the Company had applied the fair value recognition provisions ofFAS 123 to stock-based employee compensation. The net (loss)/ income per share information shown below has been adjusted for the stock split referred to in Note 5.

 

 
| ** **                      | ** **                                                                                                            | **Six Months Ended  June 30,** | ** **     |
|---------------------------------|-----------------------------------------------------------------------------------------------------------------------|--------------------------------|----------------|
| ** **                      | ** **                                                                                                            | **2004**                       | ** **     | **2003** | ** ** |
|                            |                                                                                                                  |                           | ** **     |   |   |
| Net (loss) income, as reported  | ** **                                                                                                            | **$**                          | **(688,518**   | **)** | $ | 102,195 |   |
|                            |                                                                                                                  |                           | ** **     |   |   |
| Deduct:                         | Total  stock-based employee compensation expense determined under fair value based  method for all awards  ***** | ** **                     | **(3,030,701** | **)** | (864,213 | ) |
|                            |                                                                                                                  |                           | ** **     |   |   |
| Pro-forma net loss  ****** | ** **                                                                                                            | **$**                          | **(3,719,219** | **)** | $ | (762,018 | ) |
|                                 |                                                                                                                       |                                |                |  |  |  |  |  |

 

6

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| ** **                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **2004**                       | ** ** | **2003** | ** ** |
|                           |       |                           |       |   |   |
| (Loss) income per share:       |       |                           |       |   |   |
|                           |       |                           |       |   |   |
| As reported, basic and diluted | ** ** | **$**                          | **(0.06**  | **)** | $ | 0.01 |   |
|                           |       |                           | ** ** |   |   |
| Pro-forma, basic and diluted   | ** ** | **$**                          | **(0.33**  | **)** | $ | (0.08 | ) |

 
| ** **                      | ** **                                                                                                            | **Three Months Ended  June 30,** | ** **     |
|---------------------------------|-----------------------------------------------------------------------------------------------------------------------|----------------------------------|----------------|
| ** **                      | ** **                                                                                                            | **2004**                         | ** **     | **2003** | ** ** |
|                            |                                                                                                                  |                             |           |   |   |
| Net (loss) income, as reported  | ** **                                                                                                            | **$**                            | **(375,427**   | **)** | $ | 241,531 |   |
|                            |                                                                                                                  |                             | ** **     |   |   |
| Deduct:                         | Total  stock-based employee compensation expense determined under fair value based  method for all awards  ***** | ** **                       | **(2,502,120** | **)** | (467,998 | ) |
|                            |                                                                                                                  |                             | ** **     |   |   |
| Pro-forma net loss  ****** | ** **                                                                                                            | **$**                            | **(2,877,547** | **)** | $ | (226,467 | ) |
|                            | ** **                                                                                                            | ** **                       | ** **     |   |   |
| (Loss) income per share:        |                                                                                                                  |                             | ** **     |   |   |
|                            |                                                                                                                  |                             | ** **     |   |   |
| As reported, basic and diluted  | ** **                                                                                                            | **$**                            | **(0.03**      | **)** | $ | 0.02 |   |
|                            |                                                                                                                  |                             | ** **     |   |   |
| Pro-forma, basic and diluted    | ** **                                                                                                            | **$**                            | **(0.25**      | **)** | $ | (0.02 | ) |
|                                 |                                                                                                                       |                                  |                |  |  |  |  |  |

 

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*****                 Allawards refers to awards granted, modified, or settled in fiscal periodsbeginning after December 15, 1994 - awards for which the fair value wasrequired to be measured under FAS 123.

 

********         **For purposes of pro-forma disclosures, theestimated fair value of the options is amortized over the options’ vestingperiod.  Pro-forma information regardingearnings and per share information is required by FAS 123, and has beendetermined as if the Company had accounted for its employee stock options underthe fair value method of that Statement. The fair value of these options was estimated at the date of grant usinga Black-Scholes option pricing model for years subsequent to 2000.  Prior to 2001, the fair value of the optionswas valued using the minimum value method.

 

7

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**3.             Inventories**

 

Inventoriesare stated at the lower of cost (first-in, first-out) or market.  The major classifications of inventories areas follows at period end:

 

| ** **     | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|----------------|------------|--------------------|-------------|------------------------|------------|
| ** **     | ** ** | **(Unaudited)**    | ** **  | ** **             | ** ** |
|           |       |               |        |                   |       |
| Raw materials  |       | **$**              | **24,382**  |                   | $          | 31,528 |   |
| Finished goods |       | **913,142**        |        | 692,416                |       |
|           |       | ** **         |        |                   |       |
|           |       | **$**              | **937,524** |                   | $          | 723,944 |   |

 

**4.             OtherIntangible Assets**

 

DuringMay 2004, the Company purchased patents and certain other intangible assetsamounting to $100,000.  The Company iscurrently assessing the allocation of costs and appropriate estimated usefullives of these assets and patents and as such has not recorded amortization onthese assets during the second quarter of 2004. The Company intends to complete the allocation by year end.

 

TheCompany, as a result of this purchase, may be subject to segment reporting infuture periods.

 

**5.             Stockholders’Equity**

 

***Stock Options***

 

During the three months ended June30, 2004 the Board of Directors awarded options to purchase 370,000shares at exercise prices ranging from $8.50 to $9.06 per share, to certaindirectors and employees.  These optionswere granted under the 1997 Employee, Director and Consultant Stock OptionPlan.  Of these options, 170,000 vest over fiveyears beginning at the first anniversary of the date of grant and 200,000options vested at date of grant.

** **

***Other Stock Issuances***

 

During the second quarter of 2004, 44,160 shares of common stock wereissued as a result of exercised stock options at exercise prices ranging from$0.625 to $6.810 per share. The Company also issued 8,000 shares of commonstock as a result of exercised warrants during the quarter. The exercise pricewas $1.25 per share.

 

***Stock split***

 

OnAugust 12, 2003, the Board of Directors authorized a 2-for-1 split of theCompany’s common stock effected in the form of a 100% stock dividend.  The stock dividend was paid on December 11,2003 to stockholders of record at the close of business on November 17, 2003.  No fractional shares of common stock wereissued in connection with the stock split. Par value was not changed and additional paid-in capital was charged forthe par value of the shares issued.

 

8

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Allreferences to the number of common shares and per-share amounts included in theaccompanying condensed consolidated financial statements for June 30, 2004 and 2003 have beenadjusted to reflect the stock split.

 

**6****.             License Agreement**

 

OnFebruary 7, 2001, the Company signed an exclusive license agreement with STMicroelectronics NV (“ST”) of the Netherlands. The agreement calls for ST to use certain intellectual property rightsowned or controlled by the Company to commercialize and sell related productsutilizing such technology.  Inconsideration for this license, ST paid to the Company a one-time license feeof $1.6 million in cash and a $400,000 credit for future design services.  The Company will also receive royalties basedon certain formulas, as defined in the agreement.  This agreement has no expiration date, however, either party may cancel the agreement uponcertain advance notices as defined in the agreement.  The $400,000 credit portion of the licensefee was associated with future development activities of the Company.  When the $400,000 amount was recognized inincome, it was simultaneously charged to research and development costs.

 

Inprior years, the Company recognized $220,000 of the credit for future designservices.  During the quarter ended March31, 2004, the Company recognized the remaining $180,000 of income and researchand development costs.

 

**7.             Concentrations**

 

Duringthe quarter and six months ended June 30, 2004, the Company derivedapproximately 90% and 72% of its total revenue and 67% and 74% of its productrevenue from three and four customers, respectively.

 

Duringthe quarter and six months ended June30, 2003, the Company derived approximately 86% and 82% of its totalrevenue from five and four customers, respectively.  In addition, the Company derivedapproximately 84% and 79 % of its product revenue from four and threecustomers, respectively.

 

Threeof the Company’s major customers accounted for approximately 68% of the totalaccounts receivable balance at June 30, 2004.

 

Fourof the Company’s major customers accounted for approximately 86% of the totalaccounts receivable balance at June 30,2003.

 

Duringthe quarter and six months ended June 30, 2004 58% and 67%, of the Company’stotal revenue was derived from customers in Asia and 26% and 24% of totalrevenue was derived from customers in Europe, respectively.  In addition, 86% and 95% of the Company’sproduct revenue during those periods was derived from customers in Asia,respectively.

 

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Duringthe quarter and six months ended June 30, 2003, 88% and 86%, respectively, ofthe Company’s total revenue was derived from customers in Asia and 99% of theCompany’s product sales for the same periods were to customers in Asia.

 

Oneof the Company’s major vendors accounted for approximately 99% of totalpurchases for the six months ended June 30, 2004.

 

Twoof the Company’s major vendors accounted for approximately 99% of totalpurchases for the six months ended June30, 2003.

 

TheCompany maintains accounts with financial institutions.  Balances usually exceed the maximum coverageprovided by the Federal Deposit Insurance Corporation on insured depositoraccounts.

 

Consultingincome for the three and six month periods ended June 30, 2004 includes $200,000 pursuant to agreements enteredinto during 2004.

 

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**ITEM 2****.****  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS 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, 2004 and June 30,2003 should be read in conjunction with the Company’s Financial Statements andrelated Notes included elsewhere in this Quarterly Report on Form 10-QSB. Thisdiscussion 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, 2003. The Company does not intend to update any suchforward-looking statements.

 

**OVERVIEW**

 

The Company designs,develops and markets silicon based products incorporating proprietarytechnologies.  The Company’s patentedall-digital, high efficiency Direct Digital Amplification (DDX®) technologyIntegrated Circuits (“ICs”) are used in a range of audio applicationsincluding:  home theater systems, poweredspeakers, car audio, commercial audio, and PC multi-media.  The Company is developing new System-on-Chip (SOC) products using itsanalog and digital circuit designs and Micro-Electromechanical Systems (MEMS)technology for the consumer, automotive, communications and medical markets.  Atthe appropriate time, the Company will segment the reporting of the MEMSdivision.** **Under a licensing agreement withSTMicroelectronics NV (ST) signed in February 2001, the Company is developingand providing intellectual property to be used in royalty bearing productsproduced by ST.  In addition, the Companyis working under a development agreement with ST to develop and market newsemiconductor products that leverage Apogee’s DDX technology and ST’sintellectual property and semiconductor design, development and manufacturingcapability. ST is currently shipping 15royalty bearing DDX-based semiconductor products to customers.  The Company generates revenue from thesale of DDX-based semiconductor chips and related products as well as royaltiesearned under the licensing agreement with ST. The Company has developed and is marketing 17 different DDX-basedsemiconductor products and has additional DDX and non-DDX IC products indevelopment.  The Company has offices in Massachusetts, New York, HongKong and Japan.   The Company markets its products using aworldwide network of direct sales staff, independent sales representatives anddistributors.  The Company incurred a netloss of approximately $375,400 and $688,500 for the three and six months endedJune 30, 2004, as compared to a net profit of approximately $241,500 and$102,200 for the three and six months ended June 30, 2003.  As of June 30, 2004, the Company had anaccumulated deficit of approximately $11.1 million, as compared to a deficit ofapproximately $10.4 million at December 31, 2003. Of this accumulated deficit,approximately $4 million was attributable to the Company’s now defunctloudspeaker business, which was discontinued in 1994. The Company’s net lossesand accumulated deficit (since 1995) result primarily from research costsassociated with the Company’s efforts to develop and market its DDX technology.

 

As of June 30, 2004, theCompany had 36 employees, up from 28 as of June 30, 2003.

 

During the three-monthperiod ended June 30, 2004, the Company derived approximately 67% of its totalrevenue and 90% of its product revenue from two customers and three customers,respectively.   The Company utilizes anetwork of sales representatives and distributors, as well as sales offices inHong Kong and Japan, to support the Company’s worldwide sales and marketingactivities.   In April 2004, the Companyfurther expanded its sales organization with the addition of a Country Managerfor Japan.

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

Thefollowing selected financial data for the three- and six-month periods endedJune 30, 2004 and June 30, 2003 have been derived from the Company’s financialstatements.  Any trends reflected by thefollowing table may not be indicative of future results.

 

 
| ** **                                  | ** ** | **For the Three-Month Period  Ended  June 30,** | ** ** | **For the Six-Month Period  Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Statement of Operations Data:               |       |                                            |       |                                          |       |   |   |   |   |
| Revenue                                     |       | $                                               | 1,672,261  |                                          | $          | 3,032,627 |   | $ | 3,998,584 |   | $ | 4,872,219 |   |
| Costs and expenses                          |       | (2,053,322                                      | )          | (2,791,426                                    | )          | (4,697,986 | ) | (4,773,028 | ) |
| Other Income (expenses)                     |       | 5,634                                           |       | 330                                           |       | 10,884 |   | 3,004 |   |
| Net (Loss) Profit                           |       | $                                               | (375,427   | )                                             | $          | 241,531 |   | $ | (688,518 | ) | $ | 102,195 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| Shares Outstanding                          |       | 11,400,770                                      |       | 10,786,170                                    |       | 11,400,770 |   | 10,786,170 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| Balance Sheet Data:                         |       |                                            |       |                                          |       |   |   |   |   |
| Total Assets                                |       | $                                               | 6,120,120  |                                          | $          | 5,393,402 |   | $ | 6,120,120 |   | $ | 5,393,402 |   |
| Stockholders’ equity                   |       | $                                               | 5,401,120  |                                          | $          | 2,631,900 |   | $ | 5,401,120 |   | $ | 2,631,900 |   |
| (Loss) Profit per share (basic and diluted) |       | $                                               | (0.03      | )                                             | $          | 0.02 |   | $ | (0.06 | ) | $ | 0.01 |   |

 

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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,** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                              |       |                                     |       |                                   |       |   |   |   |   |
| Product Sales                     |       | 61.98                                    | %          | 88.55                                  | %          | 68.35 | % | 86.30 | % |
| Royalties                         |       | 26.06                                    |       | 11.45                                  |       | 20.28 |   | 13.70 |   |
| Consulting                        |       | 11.96                                    |       | 0.00                                   |       | 11.37 |   | 0.00 |   |
|                              |       |                                     |       |                                   |       |   |   |   |   |
| Cost of Sales                     |       | (37.44                                   | )          | (61.49                                 | )          | (43.53 | ) | (60.20 | ) |
| Research and Development          |       | (36.25                                   | )          | (12.50                                 | )          | (32.95 | ) | (15.17 | ) |
| Sales, General and Administrative |       | (49.09                                   | )          | (18.06                                 | )          | (41.01 | ) | (22.67 | ) |
|                              |       |                                     |       |                                   |       |   |   |   |   |
| Operating (Loss) Profit           |       | (22.79                                   | )%         | 7.95                                   | %          | (17.49 | )% | 2.04 | % |
| Other Income (Expense)            |       | 0.34                                     |       | 0.01                                   |       | 0.27 |   | 0.06 |   |
| Net (Loss) Profit                 |       | (22.45                                   | )%         | 7.96                                   | %          | (17.22 | )% | 2.10 | % |

 

Revenue

 

**The Company derives its revenue fromthree 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 relatedto the development of custom ICs for STMicroelectronics and other third partieswho are developing DDX and non-DDX based solutions. **Both revenue recognized and expenses incurredby the MEMS division will be segmented at the appropriate time.

 

Totalrevenue decreased by approximately 45% or $1.3 million to $1.7 million for thethree months ended June 30, 2004 from $3.0 million for the three months endedJune 30, 2003.  Total revenue decreasedby approximately 18% or $873,600 to approximately $4.0 million for the sixmonths ended June 30, 2004 from $4.9 million for the same period in 2003.

 

Revenuefrom the sale of the Company’s products, consisting of semiconductor IC’s, aswell as, DDX evaluation and reference boards, decreased by approximately 61% or$1.6 million to approximately $1.0 million for the three months ended June 30,2004 from $2.6 million for the three months ended June 30, 2003 and by approximately35% or $1.5 million to $2.7 million for the six months ended June 30, 2004 ascompared to $4.2 million for the same period in 2003.  The Company’s revenue was impacted byunexpected weakness in demand from its key customers due to program developmentdelays and finished goods inventory buildup.

 

Revenuefrom non-product related items accounted for approximately 38% and 32% of totalrevenue for the three and six months ended June 30, 2004, respectively,compared to revenue from non-product related items of approximately 11% and 14%of total revenue for the same periods in 2003. During the three months and six months ended June 30, 2004, the Companyrecorded net royalty payments under the ST agreement of approximately $435,900and $811,000, compared to royalty payments of $347,300 and $667,300 for thesame periods in 2003, representing an increase of approximately 25% and 22% forthe respective periods.  In addition,during the three- and six-month periods ended June 30, 2004, the Companyrecorded consulting revenue of approximately $200,000 and $454,500,respectively.  No consulting revenue wasrecognized during the same periods in 2003.

Total Revenue for the Three and Six Months Ended June 30, 2004 and 2003consisted of:

 

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| ** **       | ** ** | **For the Three-Month Period  Ended  June 30,** | ** ** | **For the Six-Month Period  Ended  June 30,** | ** ** |
|------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **       | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Product  Revenue |       |                                            | $          | 1,036,397                                     |       | $ | 2,685,292 |   | $ | 2,733,088 |   | $ | 4,204,885 |   |
| Royalties        |       |                                            | 435,864    |                                          | 347,335    |   | 811,012 |   | 667,334 |   |
| Consulting       |       |                                            | 200,000    |                                          | —     |   | 454.484 |   | — |   |
|             |       |                                            |       |                                          |       |   |   |   |   |   |
| Total:           |       |                                            | $          | 1,672,261                                     |       | $ | 3,032,627 |   | $ | 3,998,584 |   | $ | 4,872,219 |   |

 

Costof Revenue

 

**Cost of revenue decreased as a result of reduced productrevenue to $626,000 and $1.7 million for the three and six months ended June30, 2004, respectively, compared to approximately $1.9 million and $3.0 millionfor the same periods in 2003.  Cost ofrevenue includes cost of purchasing finished semiconductor chips as well ascustoms and storage fees.  For the threeand six months ended June 30, 2004, the Company recorded a gross margin ofapproximately 40% and 36%, respectively, from product sales, compared to agross margin of 31% and 30%, respectively, for the same periods in 2003.  This increase in gross margin is due to therelease of new higher margin products and improved pricing from the Company’sprimary supplier.**

 

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 expenses increased toapproximately $606,200 and $1.3 million for the three months and six monthsended June 30, 2004, compared to approximately $379,000 and $735,500 for thesame periods in 2003. This increase of approximately $227,200 or 59.9% and$565,500 or 79.3%, respectively, was related to increased staffing, tooling, design software, use of third party consultants to assistwith product designs and increased depreciation and amortization.  In addition, for the six months ended June30, 2004, $180,000 was incurred as a result of the final utilization of the$400,000 design credit from ST, offsetting $180,000 of consulting revenuerecognized during the first quarter ended March 31, 2004.  For the three and six months ended June 30,2004 third party consultants accounted for approximately $39,900 and $53,400 oftotal research and development costs, up from $5,800 for both the three and sixmonth periods ended June 30, 2003.  Costsrelated to human resources for R&D increased to approximately $501,400 and$968,100 from $345,400 and $675,200 for the three months and six months endedJune 30, 2004, an increase of approximately $156,000 or 45.2% and $292,900 or43.4%, respectively.   The overallincrease reflects the Company’s expanded research and development activity asevidenced by the employment of 22 engineers and technical support staff as ofJune 30, 2004, compared to 17 for the period ended June 30, 2003, an increaseof five employees, including the addition of employees resulting from the MEMSacquisition, completed in May 2004. Depreciation and amortization expense increased to approximately $46,300and $89,100 for the three and six months ended June 30, 2004, an increase of$33,000 or 247.6% and $63,200 or 243.2%, respectively, compared to $13,300 and$25,900 for the same periods in 2003. This increase was primarily due to the acquisition of equipment andsoftware required for future chip designs. During the six months ended June 30, 2004, the Company completed andintroduced eight of the twenty-three new semiconductor products planned forintroduction during fiscal 2004.  TheCompany continues to invest in the development of its next generation of DDX,non-DDX ICs and the continuation of support to both existing and potentialcustomers.  In addition, the Company isbroadening its product base as evidenced by the acquisition of the intellectualproperty of the former Standard MEMS Company and the hiring of two of thatcompany’s former key employees.  Due tothe technical nature of the Company’s products, engineering and design supportare critical parts of the Company’s strategy during both the development of itsproducts and the support to its customers from product design to finalproduction.  Management anticipates thatit will continue to commit resources to research, development and designactivities.  It expects these expenses toincrease, but to decline as a percentage of revenue as revenue increases.

 

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

 

Sellingexpenses consist primarily of salaries and related expenses for personnelengaged in the marketing and sales of the Company’s products, as well as costsrelated to trade shows, product literature, travel and other promotionalsupport costs. In addition, selling expenses include costs of its Hong Kongsales office and support of a sales organization in Japan.  General and administrative costs consistprimarily of executive and administrative salaries, professional fees and otherassociated corporate expenses. The increase in SG & A, described below, wasattributable principally to support for the Company’s Hong Kong Office,increased human resource costs including the hiring of a Japan Country Manager,increased royalties paid to third party representatives and increasedprofessional fees.   SG&A expenseswere approximately $821,000 and $1.6 million for the three months and sixmonths ended June 30, 2004, compared to approximately $553,500 and $1.1 millionfor the same periods in 2003, an increase of approximately $267,500

 

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or 48.3% and $500,000 or 47.7%, respectively.  Human resource costs increased approximately$65,700 and $136,700 to approximately $308,500 and $633,000 during the threemonths and six months ended June 30, 2004 compared to $242,800 and $496,300 duringthe same periods in 2003, an increase of 27% for both the three- and six-monthperiods ended June 30, 2004.  Thisincrease was primarily due to higher compensation, as well as, an increase instaffing both domestically and at the Hong Kong office.  Approximately $76,900 and $153,000 of thehuman resource expense for the three and six months ended June 30, 2004 wasrelated to staffing the Hong Kong Office. This compared to approximately $58,400 and $118,000 for the same periodsin 2003.  Commissions and royalty expenseon sales increased approximately $103,800 and $279,600 to $209,600 and $385,900for the three and six months ended June 30, 2004, compared to $105,700 and$106,300 for the same periods in 2003**. **Thiswas due to discounts given to specific customer accounts.  Professional expenses increased approximately$47,400 or 101% and $59,400 or 48% to $94,300 and $183,600 for the three andsix months ended June 30, 2004 compared to $46,900 and $124,200 for the sameperiods in 2003.  Of this increaseapproximately $38,000 and $50,000 was due to the addition of a sales consultantin Japan and increased costs for a sales associate in Taiwan.  The Company expects that selling, general andadministrative expenses will increase in absolute dollars in future periods asthe Company expands its sales channels, marketing efforts and administrativeinfrastructure, but to decline as a percentage of revenue.

 

InterestIncome (Expense)

 

Interestincome, net of expense, includes income from the Company’s cash and cashequivalents and from investments and expenses related to its financingactivities.  During the three and sixmonths ended June 30, 2004, the Company generated net interest income ofapproximately $5,600 and $10,900 compared to net interest income of approximately$300 and $3,000 during the same periods in 2003.  This increase in net interest income for thethree and six months ended June 30, 2004 was primarily due to interest onincreased cash as of December 31, 2003 and reduced interest due on leased equipment.

 

Net Profit (Loss)

 

The Company’s net loss forthe three months ended June 30, 2004 was approximately $375,400 or $.03 perbasic and diluted common share, compared to a net profit of approximately$241,500 or $.02 per basic and diluted common share for the three months endedJune 30, 2003.  For the six months endedJune 30, 2004 the Company reported a loss of approximately $688,500 or $.06 perbasic and diluted common share, compared to a net profit of approximately$102,200 or $.01 per basic and diluted common share for the six months endedJune 30, 2003.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s principalsource of liquidity at June 30, 2004 consisted of approximately $1.7 million incash and short-term investments and no debt. This compares to approximately $2.5 million in cash and cash equivalentsat December 31, 2003.  This decrease incash was due to reducing the Company’s accounts payables and accrued expenses,working capital requirements and financing of the Company’s accounts receivable, and lower revenues during the period.

 

Net cash used in operationsduring the six-month period ended June 30, 2004 increased to approximately$863,200 compared to approximately $833,600 in the six-month period ended June30, 2003.  As of June 30, 2004, inventorywas approximately $937,500 compared to inventory of approximately $833,800 asof June 30, 2003.  Net accountsreceivable was approximately $2.6 million at June 30, 2004, down fromapproximately $3.3 million at June 30, 2003. This decrease in accounts receivable was due to aggressive collectionand reduced shipments of the Company’s semiconductor products.  As of June 30, 2004, three major customersaccounted for approximately 68% of the total accounts receivable balance.  The Company continued its quarterly entry ofincreasing its reserve against bad debts by $5,000 to $55,000 as of June 30,2004 from $45,000 as of December 31, 2003. The Company believes this reserve is sufficient at this time as a percentageof the Company’s receivables are secured by letters of credit.

 

Net cash used in investingactivities for the six months ended June 30, 2004 was approximately $196,900,compared to approximately $31,000 for the six months ended June 30, 2003.   Of the $196,900, $109,000 was associatedwith the acquisition of the intellectual property of the former Standard MEMSCompany in May of 2004.

 

Net cash provided byfinancing activities for the six months ended June 30, 2004 was approximately$228,500, compared to $740,900 provided by financing activities for the sixmonths ended June 30, 2003.  During thethree-month period ended June 30, 2004, the Company received $141,156 in cashfrom the exercise of options by ten employees and $10,000 in cash from theexercise of warrants.  During thethree-month period ended June 30, 2003, the Company received $11,500 in cashfrom the exercise of options by two employees and $6,250 in cash from theexercise of warrants.  The Companybelieves that cash flow from operations and amounts that may be raised fromtime to time in private offerings of its common stock will be sufficient tosupport operations and fund capital equipment requirements over the next twelvemonths.

 

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The Company prepares its consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires us to make estimates, judgments and assumptionsthat we believe are reasonable based upon the information currentlyavailable.  On an on-going basis, theCompany evaluates its estimates, including those related to uncollectibleaccounts receivable, inventories, intangibles and other long-lived assets.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the periods presented.  Any futurechanges to these estimates and assumptions could have a significant impact onthe reported amounts of revenue, expenses, assets and liabilities in ourfinancial statements.  The significantaccounting policies which we believe are the most critical to aid in fullyunderstanding and evaluating our reported financial results include thefollowing:

 

RevenueRecognition

 

Apogeerecognizes revenue from product sales at the time of shipment, when the salesprice is fixed and determinable and collectibility is reasonably assured.  The Company’s standard terms and conditionsof sale do not offer a right of return on product sales.** **Any price adjustmentafter shipment of goods is recorded as an offset to revenue.  For sales transactions, we comply with theprovisions of Staff Accounting Bulletin 104, Revenue Recognition, which statesthat revenue should be recognized when the following revenue recognitioncriteria are met:  (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped and thecustomer takes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable is reasonablyassured.   In addition, the Companyrecords royalty revenue when earned in accordance with the underlyingagreements.  Consulting revenue isrecognized as services are performed.

 

AccountsReceivable

 

TheCompany performs credit evaluations of customers and determines credit limitsbased upon payment history, customers’ creditworthiness and other factors, asdetermined by our review of their current credit information.  For a majority of our larger sales, we canrequire the issuance of a letter of credit. Smaller accounts must either pay via credit card or in advance ofshipment.  We continuously monitorcollections and payments from our customers, and we maintain a provision forestimated credit losses based upon our historical experience and any specificcustomer collection issues that we have identified.  While we have not had any significant creditlosses to date, we cannot guarantee that we will continue to avoid creditlosses in the future.  If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.  Since our accounts receivableare highly concentrated in a small number of customers, a significant change inthe liquidity or financial position of any one of these customers could have amaterial adverse impact on the collectibility of our accounts receivable, ourliquidity or our future results of operations.

 

Inventory

 

Apogeestates its inventory at the lower of cost (first-in, first-out) or market.  The Company maintains allowances forestimated excess or obsolete inventories based on the Company’s review ofinventory levels, projected future sales and comparison of actual manufacturingcosts to standard costs. If actual market conditions are less than favorablethan those projected by management, additional allowances may be required.

 

Valuationof Long-Lived Assets

 

Property,plant and equipment, patents, trademarks and other intangible assets areamortized over their estimated useful lives. Useful lives are based onmanagement’s estimates over the period that such assets will generate revenue.Intangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not berecoverable. Future adverse changes in market conditions or poor operatingresults of underlying capital investments or intangible assets could result inlosses or an inability to recover the carrying value of such assets, therebypossibly requiring an impairment charge in the future.

 

**CERTAINRISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND OUR COMMON STOCKPRICE**

 

There are anumber of important factors that could cause our actual results to differmaterially from those indicated or implied by forward-looking statements.Factors that could cause or contribute to such differences include thosediscussed below, as well as those discussed elsewhere in this Form 10-QSB. Wedisclaim any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwiseexcept as may be required by law.

 

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**RISKS RELATED TO OUR BUSINESS**

 

**WE HAVE HAD A HISTORY OF LOSSES ANDMAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY.**

 

Asof June 30, 2004, we had an accumulated deficit of approximately $11.1 million.Of this amount, approximately $4 million was generated by the Company’s formerloudspeaker subsidiary, Apogee Acoustics, Inc., which discontinued operationsin 1994.  We recorded a loss ofapproximately $375,400 and $688,500 for the three- and six-month periods endedJune 30, 2004.  The Company recorded a netprofit of approximately $756,600 for the year ended December 31, 2003, but hadnet losses of $1,065,300 in 2002, $895,000 in 2001, $1.9 million in 2000 and$1.1 million in 1999.  We will need togenerate revenue to sustain year-to-year profitability and positive cash flow.  Our ability to generate future revenue andsustain profitability will depend on a number of factors, many of which aredescribed throughout this risk factor section. If we are unable to achieve and maintain profitability, our share pricewould likely decline.

 

**THE COMPANY HAS ONLY A SMALL NUMBEROF CUSTOMERS, AND THE LOSS OF ANY OF THESE CUSTOMERS WOULD HAVE A MATERIALADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

During the sixmonths ended June 30, 2004, the Company derived approximately 72% of its totalrevenue and 74% of product revenue from three customers and four customers,respectively.  The loss of any of theCompany’s customers, or a significant decrease in the amount of revenuegenerated from any of these customers, would have a material adverse effect onits business, financial condition and results of operations.  The Company is working to diversify itscustomer base in order to reduce its dependence on a small number ofcustomers.  The Company may not be ableto succeed in these efforts.

 

**OUR BUSINESS IS CONCENTRATED IN ALIMITED NUMBER OF MARKETS AND ANY SIGNIFICANT CHANGE IN THESE MARKETS COULDHAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

Approximately67% and 24% of the Company’s total revenue for the six months ended June 30,2004 were to customers in Asia and Europe, respectively.  In addition, 95% of product revenue was fromcustomers in Asia.  A significantpercentage of the Company’s product revenue is to manufacturers producing DVDReceivers.  This is a relatively newconsumer electronic product with a limited sales history.  The Company intends to develop new markets inorder to diversify the market applications of its products.

 

**OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND,THEREFORE, OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS IN ATIMELY FASHION.**

 

The life cycle of thetechnology and any future products developed by us may be limited by theemergence of new products and technologies, changes in consumer preferences andother factors.  Our future performancewill depend on our ability to consistently:

 

•                  identify emerging technological trends in ourmarket

 

•                  identify changing consumer requirements

 

•                  develop or maintain competitive technology,including new product offerings

 

•                  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.

 

We may not succeed indeveloping and marketing new products that respond to technological andcompetitive developments and changing customer needs, or and such products maynot gain market acceptance and be incorporated into the technology or productsof third parties.  Any significant delayor failure to develop new enhanced technologies, including new productofferings, and any failure of the marketplace to accept any new technology andproduct offerings would have a material adverse effect on our business,financial condition and results of operations.

 

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**WE MAY REQUIRE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS ANDRESEARCH AND DEVELOPMENT.**

 

We havefrequently incurred net losses from operations and may continue to do so in thefuture.  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. Any sale of securities would result in dilution to our currentstockholders’ ownership in the Company.

 

**OUR ABILITY TO ACHIEVE SUSTAINED REVENUE GROWTH WILL BEHARMED IF WE ARE UNABLE TO MAINTAIN OUR EXISTING LICENSING RELATIONSHIPS.**

 

Part of ourbusiness strategy is to expand our licensing activities with STMicroelectronicsand to enter into licensing relationships with other companies in order tooffer products to a larger customer base than could be reached through our owndevelopment and marketing efforts.  We believethat such relationships can accelerate market penetration of our products andtechnologies, while limiting our manufacturing exposure and sales and marketingcosts.  However, we may not be able toexpand or maintain our existing licensing relationships or establish newlicensing relationships on commercially reasonable terms, if at all.  Any future inability by us to maintain andexpand our licensing relationships or to enter into additional licensingrelationships, or the failure of one or more of our licensing relationships tocontribute to the development and maintenance of a market for our products,could have a material adverse effect on our business, operating results andfinancial condition.

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

** **

We haveexperienced fluctuations in our quarterly operating results in the past and itis likely that these fluctuations will continue in the future.  These fluctuations are caused by manyfactors, including, but not limited to:

 

•                  availability and pricing from our suppliers;

 

•                  changes in the demand for our products by customers;

 

•                  introductions or enhancements of products, or delays in theintroductions or enhancements of products, by us or our competitors;

 

•                  rate and success of new customer development;

 

•                  changes in our pricing policies or those of our competitors;

 

•                  success in attracting, retaining and motivating qualifiedpersonnel; and

 

•                  changes in general economic conditions.

 

A substantialportion of our operating expenses is related to personnel, facilities, andsales and marketing programs and are fixed. Our expense level is based in part on our expectations of future ordersand sales, which are extremely difficult to predict.  Accordingly, we may not be able to adjust ourfixed expenses quickly enough to address any significant shortfall in demandfor our products in relation to our expectations.

 

Fluctuationsin our operating results may also result in fluctuations in our common stockprice.  In such event, the trading priceof our common stock would likely suffer and adversely affect our ability toraise capital and the value of your investment in the Company.

 

**IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MAY NOTBE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY.**

 

We may not besuccessful in recruiting and retaining executive officers and other keymanagement and technical personnel.  Thecompetition for employees with the necessary high level of technical expertiseto design, market and sell our products is intense, particularly in eastern Massachusettsand Asia.  We will need to hire a numberof additional technical personnel if we are to increase the rate at which wedevelop new products.  Becausecompetition for highly skilled technical personnel is so intense, companies inApogee’s industry are subject from time to time to complaints brought bycompetitors alleging interference with contractual relations or wrongful hiringof employees.  Such lawsuits may becostly, may divert management attention and resources from the operation of ourbusiness, and may therefore adversely affect our financial condition andresults of operations.  In addition, theloss of the management and technical expertise of our senior management couldseriously harm us.  Our employees mayalso be recruited away from us by our competitors.  The Company does not have in place employmentcontracts for some members of its senior management, including the COO and VicePresident of Engineering.

** **

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** **

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

 

We have nomanufacturing capabilities, nor do we have plans to establish any suchcapabilities.  Accordingly, we utilizeoutside semiconductor foundries, assembly and test companies to manufacture oursemiconductor 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 foundry relationships, the failureof which could result in significant delays in product introduction due to thetime necessary to establish new relationships

 

•                  delays in production or shortages in product delivery as aresult of production problems at outside contractors

 

•                  the loss of foundry priority that may limit our ability toobtain products on schedule,

 

•                  limited control over product quality that could result inproduct returns and the loss of customers,

 

•                  inability tocontrol manufacturing yield that could increase production costs, therebyreducing sales potential and operating margins, and

 

•                  lack of access or control over new process and manufacturingtechnologies to maintain product competitiveness in the market.

 

**OURPRODUCTS USE NEW TECHNOLOGY AND MAY HAVE MANUFACTURING DEFECTS OR OTHERCHARACTERISTICS THAT ARE ONLY DETECTED AFTER INSTALLATION IN CUSTOMERAPPLICATIONS, WHICH MAY HARM OUR BUSINESS.**

 

Our productsare based on recently developed technology and are manufactured usingstate-of-the-art manufacturing processes. Our approach to product qualification and testing may not fully evaluateor identify product characteristics or defects that could adversely affect theproduct’s ability to operate in the intended application.  If such defects or characteristics arediscovered after installation, product revenue might be significantly delayedand our ability to maintain existing customers and to retain new customers maybe seriously affected.

 

**OUR ABILITY TO ACHIEVE REVENUE GROWTH WILL BE HARMED IF WEARE UNABLE TO PERSUADE THE MARKET TO ADOPT OUR TECHNOLOGIES.**

 

We facechallenges in persuading manufacturers to adopt our products using our DDXamplifier technology, our QRX power supply products, and our MEMS technology.  Traditional amplifiers use design approachesdeveloped in the 1930s.  These approachesare still used in most amplifiers and engineers are familiar with these designapproaches.  In order to adopt ourproducts, manufacturers and engineers must understand and accept our newtechnology.  In addition, our amplifier,power supply and MEMS technologies may be more expensive for some applicationsthan traditional technologies.  For thesereasons, prospective customers may be reluctant to adopt our technology.

 

**INTENSE COMPETITION IN THE SEMICONDUCTOR AND CONSUMER AUDIOINDUSTRY COULD PREVENT US FROM ACHIEVING AND SUSTAINING PROFITABILITY.**

 

The semiconductor and consumeraudio industry is highly competitive, and we expect the intensity of thecompetition to increase. Many of our competitors have greater financial,technical, research, marketing, sales, distribution, service and otherresources than we do.  Moreover, ourcompetitors may offer broader product lines and have greater name recognitionthan we do, and may offer discounts as a competitive tactic, forcingintense pricing pressure on our semiconductor products.  In addition, several development stagecompanies are currently creating or developing technologies and products thatcompete with or are being designed to compete with our technologies andproducts.  Our competitors may develop ormarket technologies or products that are more effective or more commerciallyattractive than our current or future products, or that may render ourtechnologies or products less competitive or obsolete.  Accordingly, if competitors introducesuperior technologies or products and we cannot make enhancements to ourtechnologies 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 PROPRIETARY RIGHTS MAY BEINSUFFICIENT TO PROTECT OUR COMPETITIVE POSITION.**

 

Our businessdepends, in part, on our ability to protect our intellectual property.  We rely primarily on patent, copyright,trademark and trade secret laws to protect our proprietary technologies.  We cannot be sure that such measures willprovide meaningful protection for our proprietary technologies andprocesses.  We have four issued UnitedStates patents and three pending patent applications.  In addition, we recently acquired a portfolioof MEMS intellectual property and the Company is reviewing this portfolio todetermine which of the acquired rights will be most useful in itsbusiness.  We cannot be sure that anyexisting or future patents will not be challenged, invalidated or circumvented,or that any rights granted thereunder would provide us meaningfulprotection.  The failure of any patentsto provide protection to our technology would make it easier for ourcompetitors to offer similar products.

 

We alsogenerally enter into confidentiality agreements with our employees and strategicpartners, and generally control access to and distribution of our documentationand other proprietary information. Despite these precautions, it may be possible for a third party to copyor otherwise obtain and use our products or technology without authorization,develop similar technology independently or design around our patents.  In addition, effective copyright, trademarkand trade secret protection may be unavailable or limited in certain foreigncountries in which we operate.

 

**WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY RIGHTS DISPUTESWHICH COULD DIVERT MANAGEMENT’S ATTENTION AND COULD BE COSTLY.**

 

Thesemiconductor and consumer audio industries are characterized by vigorousprotection and pursuit of intellectual property rights. From time to time, wemay receive notices of claims of infringement, misappropriation or misuse ofother 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.  Forexample, in a patent or trade secret action, an injunction could be issuedagainst us requiring that we withdraw particular products from the market ornecessitating that specific products offered for sale or under development beredesigned.

 

Irrespectiveof the validity or successful assertion of various claims of infringement,misappropriation or misuse of other parties’ proprietary rights, we wouldlikely incur significant costs and diversion of our management and personnelresources with respect to the defense of such claims, which could seriouslyharm our business.  If any claims oractions are asserted against us, we may seek to obtain a license under a thirdparty’s intellectual property rights.  Wecannot be sure that under such circumstances a license would be available oncommercially reasonable terms, if at all. Moreover, we often incorporate the intellectual property of ourstrategic customers into our designs, and we have certain obligations withrespect to the non-use and non- disclosure of such intellectual property.  We cannot be sure that the steps taken by usto prevent our, or our customers’, misappropriation orinfringement of the intellectual property will be successful.

** **

**RISKS RELATING TO OUR COMMON STOCK**

 

**FACTORS UNRELATED TO OUR BUSINESS COULD NEGATIVELY IMPACT THEMARKET PRICE OF OUR COMMON STOCK.**

 

The stock markets haveexperienced extreme price and volume fluctuations that have affected andcontinue to affect the market prices of equity securities of many technologycompanies.  These fluctuations often havebeen unrelated or disproportionate to the operating performance of thosecompanies.  We expect that the marketprice of our Common Stock will fluctuate as a result of variations in ourquarterly operating results, or for other reasons that are not related to theperformance of our business.  Thesefluctuations may be exaggerated if the trading volume of our Common Stock islow.  In addition, due to the technology-intensivenature of our business, the market price for our Common Stock may rise and fallin response to various factors, including:

 

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

 

•                  investor perceptions and expectations regarding our or ourcompetitors’ products;

 

•                  acquisitions or strategic alliances by us or ourcompetitors; and

 

•                  the gain or loss of a significant customer or order.

 

In addition,market fluctuations, as well as general economic, political and marketconditions such as recessions, interest rate changes or international currencyfluctuations, may negatively impact the market price of our Common Stock.

 

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**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, 2004, 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 offices 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 Disclosure Controls andProcedures.  The Company’s chiefexecutive officer and principal financial officer have reviewed and evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rules 13d-15 (e) and 15d-15 (e)) as of the end of theperiod 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 during theperiod in which this Quarterly Report on Form 10-QSB was being prepared.

 

(b)         Changes in Internal Controls.  There were no changes in our internal controlover financial reporting, identified in connection with the evaluation of suchinternal control that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II** - OTHER INFORMATION

 

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

 

None.

 

**ITEM 2****- CHANGES IN SECURITIES ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

During the second quarterended June 30, 2004, 44,160 shares of the Company’s Common Stock were issued toemployees as a result of the exercise of certain options pursuant to theCompany’s 1997 Employee, Director and Consultant Stock Option Plan (the“Plan”).  The exercise price for theseshares ranged from $0.625 per share to $6.81 per share.

 

On May 5, 2004, 8,000 sharesof the Company’s Common Stock were issued to an investor as a result of theexercise of warrants issued pursuant to a Stock Subscription Agreement in aprivate placement dated January 25, 2000. The exercise price for these shares was $1.25 per share.  The exemption from registration relied uponwas Section 4(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”).

 

Duringthe second quarter ended June 30, 2004, the Company granted options toemployees and directors to purchase, in the aggregate, up to 370,000 shares ofthe Company’s Common Stock at exercise prices ranging from $8.50 per share to$9.06 per 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 25, 2004.  The following matters were voted upon:

 

(1)          Mr. Herbert M. Stein was elected by a plurality of the shares entitledto vote at the meeting to serve as a Director of the Company to hold officeuntil the annual meeting of the Corporation in 2007.  This proposal was approved with 9,568,040votes for the proposal, 95,258 votes against the proposal and no abstentions.

 

(2)          Mr. Arthur S. Reynolds was elected by a plurality of the sharesentitled to vote at the meeting to serve as a Director of the Company to holdoffice until the annual meeting of the Corporation in 2006.  This proposal was approved with 9,651,958votes for the proposal, 11,340 votes against the proposal and no abstentions.

 

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(3)          The shareholders ratified the appointment of Yohalem Gillman &Company, LLP as the independent public accountants for the Company for thefiscal year ending December 31, 2004. This proposal was approved with 9,662,248 votes for the proposal, 50 votesagainst the proposal, and 1,000 abstentions and no broker non-votes.

 

(4)          Following the annual meeting, the Company’s Board of Directorsconsisted of:  Mr. Arthur S. Reynolds,Mr. Herbert M. Stein, Ms. Sheryl B. Stein and Mr. Alan W. Tuck.

 

None.

 

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

 

None.

 

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

 

(a)           Exhibits:

 

See Exhibit Index

 

(b)           Reports on Form 8-K:

 

None.

 

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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 16, 2004 | By:                          | /s/        Herbert  M. Stein |   |
|                  |                         | Name:  Herbert M. Stein |
|                  |                         | Title:  Chairman of the Board, |
|                  |                         | President,  Chief Executive Officer and Treasurer |
|                  |                         | (principal  financial officer and principal accounting officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                      |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                 |
| 10.1                |       | Employment Agreement dated June 7, 2004 between Herbert M. Stein and  Apogee Technology, Inc.                                                                                                        |
|                |       |                                                                                                                                                                                                 |
| 10.2*               |       | Transfer, Employment and Royalty Agreement dated April 30, 2004  between Glenn Fricano and Apogee Technology, Inc.                                                                                   |
|                |       |                                                                                                                                                                                                 |
| 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. |
|                |       |                                                                                                                                                                                                 |
| 32.1                |       | 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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| * |   | Certain confidential material contained in this document has been  omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
|---|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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