**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-QSB**

**(Mark One)**

 
|       | ý | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                        |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   | ** **                                                                                                                                                                                                                                          |
|       |   | **For the quarterly period ended September 30,  2005**                                                                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                |
|       | o      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                       |
| ** ** |   | **For the transition period from                   to                 .** |

 

**Commission file number 000-30656**

 

**APOGEETECHNOLOGY, INC.**

(Exact name of registrantas specified in its charter)

 
| **DELAWARE**                                                       | **04-3005815**                     |
|--------------------------------------------------------------------|------------------------------------|
| (State or other jurisdiction of   incorporation or organization)   | (IRS Employer  Identification No.) |
| ** **                                                         |
| **129 MORGAN DRIVE, NORWOOD,  MASSACHUSETTS 02062** **00000** |
| (Address of principal  executive offices)                          |
|                                                               |
| **(781) 551-9450**                                                 |
| (Issuer’s telephone number, including area code)              |

 

 

**NOTAPPLICABLE.**

(Former name, formeraddress and former fiscal year,

if changed since lastreport)

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes ý No o

 

Transitional Small Business Disclosure Format (Checkone):   Yes o No ý

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No ý

 

Statethe number of shares of each of the Issuer’s classes of common equity, as ofthe latest practicable date:  As ofNovember 4, 2005, there were 11,968,332 shares of Common Stock, $.01 par valueper share, outstanding.

 

 

 

 

 

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**APOGEETECHNOLOGY, INC.**

 

**INDEX OF INFORMATION CONTAINED INFORM 10-QSB FOR THE**

**QUARTERENDED SEPTEMBER 30, 2005 AND RESTATED SEPTEMBER 30, 2004**

 

 
|                                                                                                  |                                                                                                                                                                              |   | **PAGE** |
|-------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| **PART  I-FINANCIAL INFORMATION**                                                                     |                                                                                                                                                                              |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 1 - Financial  Statements                                                                        |                                                                                                                                                                              |
|                                                                                                  | Condensed Consolidated Balance  Sheets at September 30, 2005 (all unaudited) and December 31, 2004 (audited)                                                                      | 3      |
|                                                                                                  | Condensed Consolidated  Statements of Operations and Accumulated Deficit for the Three and Nine  Months Ended September 30, 2005 and restated September 30, 2004 (all  unaudited) | 4      |
|                                                                                                  | Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2005 and  restated September 30, 2004 (all unaudited)                                    | 5      |
|                                                                                                  | Notes to Condensed  Consolidated Financial Statements (all unaudited)                                                                                                             | 6      |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 2 -  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 21                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 3 -  Quantitative and Qualitative Disclosures about Market Risk                                  | 33                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 4 - Controls  and Procedures                                                                     | 33                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| **PART  II - OTHER INFORMATION**                                                                      |                                                                                                                                                                              |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 1 - Legal  Proceedings                                                                           | 33                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                 | 34                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 3 -  Defaults Upon Senior Securities                                                             | 34                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 4 -  Submission of Matters to a Vote of Security Holders                                         | 34                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 5 - Other  Information                                                                           | 34                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Item 6 - Exhibits                                                                                     | 34                                                                                                                                                                                |
|                                                                                                  |                                                                                                                                                                              |   |     |
| Signatures                                                                                            | 35                                                                                                                                                                                |
|                                                                                                       |                                                                                                                                                                                   |        |          |  |

 

 

2

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                 | ** ** | **September 30,** | ** **    | **DECEMBER 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|---------------|------------------|------------|
| ** **                                                                                                                                 | ** ** | **2005**          | ** **    | **2004**         | ** ** |
| ** **                                                                                                                                 | ** ** | **(Unaudited)**   | ** **    | **(Audited)**    | ** ** |
| **ASSETS**                                                                                                                                 | ** ** | ** **        | ** **    | ** **       | ** ** |
| **Current assets**                                                                                                                         | ** ** | ** **        | ** **    | ** **       | ** ** |
| Cash and cash equivalents                                                                                                                  | ** ** | **$**             | **812,485**   | ** **       | **$**      | **1,886,883** | ** ** |
| Accounts receivable, net of allowance for doubtful accounts of  $145,000 and $105,000, respectively                                        | ** ** | **465,456**       | ** **    | **533,113**      | ** ** |
| Inventories, net                                                                                                                           | ** ** | **1,751,900**     | ** **    | **2,725,308**    | ** ** |
| Deferred costs other                                                                                                                       | ** ** | **367,525**       | ** **    | **—**       | ** ** |
| Deferred note financing costs                                                                                                              | ** ** | **306,000**       | ** **    | **—**       | ** ** |
| Prepaid expenses and other current assets                                                                                                  | ** ** | **61,956**        | ** **    | **252,728**      | ** ** |
| Total current assets                                                                                                                       | ** ** | **3,765,322**     | ** **    | **5,398,032**    | ** ** |
| **Property and equipment, net of accumulated depreciation  of $427,240 and $376,951, respectively**                                        | ** ** | **116,526**       | ** **    | **103,189**      | ** ** |
| **Other assets**                                                                                                                           | ** ** | ** **        | ** **    | ** **       | ** ** |
| Patent, net of accumulated amortization of $147,206 and $127,442,  respectively                                                            | ** ** | **266,387**       | ** **    | **211,901**      | ** ** |
| ** **                                                                                                                                 | ** ** | **$**             | **4,148,235** | ** **       | **$**      | **5,713,122** | ** ** |
| ** **                                                                                                                                 | ** ** | ** **        | ** **    | ** **       | ** ** |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY (DEFICIENCY)**                                                                                     | ** ** | ** **        | ** **    |
| **Current liabilities**                                                                                                                    | ** ** | ** **        | ** **    | ** **       | ** ** |
| Accounts payable and accrued expenses                                                                                                      | ** ** | **$**             | **1,705,754** | ** **       | **$**      | **1,107,111** | ** ** |
| Deferred distributor revenue                                                                                                               | ** ** | **1,724,009**     | ** **    | **1,955,563**    | ** ** |
| Note payable other                                                                                                                         | ** ** | **2,000,000**     | ** **    | **—**       | ** ** |
| Notes payable Officer and shareholder                                                                                                      | ** ** | **500,000**       | ** **    | **—**       | ** ** |
| Advances                                                                                                                                   | ** ** | **205,000**       | ** **    | **—**       | ** ** |
| Deferred contract revenue                                                                                                                  | ** ** | **72,686**        | ** **    | **95,788**       | ** ** |
| Total current liabilities                                                                                                                  | ** ** | **6,207,449**     | ** **    | **3,158,462**    | ** ** |
| **Commitments and Contingencies**                                                                                                          | ** ** | **—**        | ** **    | **—**       | ** ** |
| **Stockholders' equity  (deficiency)**                                                                                                     | ** ** | ** **        | ** **    | ** **       | ** ** |
| Common stock, $.01 par value; 20,000,000 shares authorized,  11,838,332 issued and outstanding at September 30, 2005 and December 31, 2004 | ** ** | **118,383**       | ** **    | **118,383**      | ** ** |
| Additional paid-in capital                                                                                                                 | ** ** | **18,073,223**    | ** **    | **18,073,223**   | ** ** |
| Accumulated deficit                                                                                                                        | ** ** | **(20,250,821**   | **)**         | **(15,636,946**  | **)**      |
| Total stockholders' equity (deficiency)                                                                                                    | ** ** | **(2,059,215**    | **)**         | **2,554,660**    | ** ** |
| ** **                                                                                                                                 | ** ** | **$**             | **4,148,235** |             | **$**      | **5,713,122** |   |
|                                                                                                                                            |            |                   |               |                  |            |  |  |  |  |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

 

3

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**

 
| ** **                                                          | ** ** | **THREE MONTHS ENDED** | ** **      | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|-----------------|-----------------------|------------|
| ** **                                                          | ** ** | **September, 30**      | ** **      | **September, 30**     | ** ** |
| ** **                                                          | ** ** | **2005**               | ** **      | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(Restated)**         | ** **      | **(Restated)**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                        | ** ** | ** **             | ** **      | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **$**                  | **1,157,789**   | ** **            | $          | 1,388,132 | ** ** | **$** | **3,326,238** | ** ** | $ | 3,926,841 | ** ** |
| Royalties                                                           | ** ** | **212,397**            |            | 446,415               | ** ** | **473,328** |   | 890,388 |   |
| Consulting                                                          | ** ** | **150,000**            |            | 161,270               | ** ** | **150,000** |   | 665,754 |   |
| ** **                                                          |       | **1,520,186**          |            | 1,995,817             | ** ** | **3,949,566** |   | 5,482,983 |   |
| **Costs and expenses**                                              | ** ** | ** **             | ** **      | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **1,122,084**          |            | 1,153,299             | ** ** | **2,975,312** |   | 3,240,038 |   |
| Research and development                                            | ** ** | **785,403**            |            | 664,032               | ** ** | **2,308,410** |   | 1,982,625 |   |
| Selling, general and administrative                                 | ** ** | **1,158,569**          |            | 632,733               | ** ** | **3,251,653** |   | 1,905,500 |   |
| ** **                                                          |       | **3,066,056**          |            | 2,450,064             | ** ** | **8,535,375** |   | 7,128,163 |   |
| **Operating loss**                                                  | ** ** | **(1,545,870**         | )               | (454,247              | )          | **(4,585,809** | ) | (1,645,180 | ) |
| **Other (expense) income**                                          | ** ** | ** **             | ** **      |                  |       | ** ** | ** ** |   |   |
| Interest/finance expense                                            | ** ** | **(35,552**            | )               | —                |       | **(38,930** | ) | — |   |
| Interest income                                                     | ** ** | **4,814**              |            | 5,365                 |       | **10,865** |   | 16,249 |   |
| ** **                                                          |       | **(30,738**            | **)**           | 5,365                 |       | **(28,065** | ) | 16,249 |   |
| **Net loss**                                                        | ** ** | **(1,576,608**         | )               | (448,882              | )          | **(4,613,874** | ) | (1,628,931 | ) |
| Accumulated deficit -  beginning                                    | ** ** | **(18,674,212**        | )               | (13,431,796           | )          | **$** | **(15,636,946** | **)** | $ | (12,251,748 | ) |
| **Accumulated deficit - ending**                                    | ** ** | **$**                  | **(20,250,820** | **)**                 | $          | (13,880,678 | ) | **$** | **(20,250,820** | **)** | $ | (13,880,678 | ) |
| **Basic and diluted loss per common share**                         | ** ** | **$**                  | **(0.13**       | **)**                 | $          | (0.06 | ) | **$** | **(0.39** | **)** | $ | (0.14 | ) |
| **Weighted average common shares outstanding - basic  and diluted** | ** ** | **11,838,332**         |            | 11,566,166            |       | **11,838,332** |   | 11,438,871 |   |

 

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

 

4

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**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS (Unaudited)**

 
| ** **                                                                              | ** ** | **NINE MONTHS ENDED** | ** **     |
|-----------------------------------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                                              | ** ** | **September 30,**     | ** **     |
| ** **                                                                              | ** ** | **2005**              | ** **     | **2004** | ** ** |
| ** **                                                                              | ** ** | ** **            | ** **     | **(Restated)** | ** ** |
| **Cash flows from operations**                                                          | ** ** | ** **            | ** **     | ** ** | ** ** |
| Net loss                                                                                | ** ** | **$**                 | **(4,613,874** | **)** | $ | (1,628,931 | ) |
| *Adjustments to reconcile net (loss) income to net  cash used in operating activities:* | * *   | * *              | * *       | * * | * * |
| Provision for doubtful accounts                                                         | ** ** | **40,000**            |           | 15,000 |   |
| Provision for slow moving, excess and obsolete inventory                                | ** ** | **576,238**           |           | 420,421 |   |
| Depreciation and amortization                                                           | ** ** | **70,053**            |           | 74,716 |   |
| *Changes in operating assets and liabilities:*                                          | * *   | * *              | * *       | * * | * * |
| Accounts receivable                                                                     | ** ** | **27,656**            |           | 754,058 |   |
| Inventories                                                                             | ** ** | **397,171**           |           | (800,494 | ) |
| Prepaid expenses and other current assets                                               | ** ** | **190,774**           |           | (40,389 | ) |
| Accounts payable and accrued expenses                                                   | ** ** | **598,643**           |           | 40,211 |   |
| Deferred note financing costs                                                           | ** ** | **(367,525**          | )              | — |   |
| Deferred note other                                                                     | ** ** | **(306,000**          | )              | — |   |
| Deferred product revenue                                                                | ** ** | **(231,554**          | )              | (604,677 | ) |
| Deferred contract revenue                                                               | ** ** | **(23,103**           | )              | 45,788 |   |
| Net cash used in operating activities                                                   | ** ** | **(3,641,521**        | )              | (1,724,297 | ) |
| **Cash flows from investing  activities**                                               | ** ** | ** **            | ** **     | ** ** | ** ** |
| Purchases of property and equipment                                                     | ** ** | **(63,626**           | )              | (42,614 | ) |
| Patent costs                                                                            | ** ** | **(74,251**           | )              | (38,803 | ) |
| Other intangible assets                                                                 | ** ** | **—**            |           | (114,056 | ) |
| Net cash used in investing activities                                                   | ** ** | **(137,877**          | )              | (195,473 | ) |
| **Cash flows from financing  activities**                                               | ** ** | ** **            | ** **     | ** ** | ** ** |
| Proceeds from issuances of common stock                                                 | ** ** | —                |           | 1,906,899 |   |
| Proceeds from loan                                                                      | ** ** | **2,000,000**         |           | — |   |
| Proceeds from officer loan                                                              | ** ** | **250,000**           |           | — |   |
| Proceeds from shareholder loan                                                          | ** ** | **250,000**           |           | — |   |
| Proceeds from Advance                                                                   | ** ** | **205,000**           |           | — |   |
| Net cash provided by financing activities                                               | ** ** | **2,705,000**         |           | 1,906,899 |   |
| **Decrease in cash and cash  equivalents**                                              | ** ** | **(1,074,398**        | )              | (12,871 | ) |
| Cash and cash equivalents  - beginning                                                  | ** ** | **1,886,883**         |           | 2,524,209 |   |
| **Cash and cash equivalents -  ending**                                                 | ** ** | **$**                 | **812,485**    |   | $ | 2,511,338 |   |
|                                                                                         |            |                       |                |  |  |  |  |  |  |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

5

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2005 AND RESTATED SEPTEMBER 30, 2004**

 

**1.             TheCompany and Basis of Presentation**

 

***The Company***

 

Apogee Technology, Inc. and Subsidiary (the “Company” or “Apogee”)designs, develops and markets silicon based products incorporating proprietarytechnologies.  The Company historicallyowned, developed and marketed patented all-digital, high efficiency DirectDigital Amplification (DDX®) technology Integrated Circuits (“ICs”) which areused in a range of audio applications, including:  home theater systems, powered speakers, caraudio, commercial audio, and PC multi-media. On October 5, 2005 the Companysold its audio business through the sale of certain assets and, in particular,its DDX technology to SigmaTel, Inc. as detailed in Note 13 — Subsequent Eventsand as a result has discontinued its audio division. The Company is developingnew system-on-chip products using its analog and digital circuit designs andMicro-Electromechanical Systems (“MEMS”) technology for the consumer,automotive, industrial and medical markets.

 

***Basis of Presentation***

 

The financial statements include the accounts of Apogee Technology,Inc., and its wholly owned inactive subsidiary, DUBLA, Inc. All significantintercompany transactions and accounts have been eliminated.

 

In the opinion of the Company’s management, all adjustments, consistingof normal recurring accruals considered necessary for a fair presentation, havebeen included in the accompanying unaudited financial statements.  Operating results for the nine months endedSeptember 30, 2005 are not necessarily indicative of the results that may beexpected for the full year ending December 31, 2005.

 

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates, and such differences could affect the results of operations reportedin future periods and such differences could be material.

 

***Liquidity***

 

The Company’s consolidated financial statements have been preparedassuming the Company will continue as a going concern.  Becausethe Company has had recurring losses and at September 30, 2005 has deficienciesof working capital and stockholders’ equity of approximately $2.4 million and$2.0 million, respectively.  Subsequentto September 30, 2005, the Company sold for $9.4 million certain assets and itsDDX technology to SigmaTel, Inc.  The Companybelieves that its working capital will be sufficient to fund its capital andoperational requirements at least through 2006. See Subsequent Events - Note 13.

 

The long term success of the Company is dependent upon its ability tosuccessfully develop and market its MEMS technology and raise additional fundsif needed for such purpose.  There can beno assurance, however, that the Company will be able to raise the funds that itneeds to continue its operations or that additional funds will be available tothe Company on acceptable terms, if at all.

 

In May 2005, the Company received proceeds from unsecuredinterest-bearing loans in the amounts of $250,000 from David Spiegel, ashareholder and $250,000 from Herbert Stein, Chief Executive Officer, Presidentand Chairman of the Board.  These loanswere payable upon demand and were not subject to any premium or penalty forprepayment.

 

6

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The loan interest rate was 6% per annum, payable monthly in arrears onthe outstanding balance.   On October 20, 2005 proceeds from theSigmaTel transaction were used to repay the $500,000 principal as well as allaccrued interest. See Subsequent Events - Note 13.

 

On August 11, 2005, the Company entered into agreements with LaurusMaster Fund, Ltd. (“Laurus”), whereby the Company received $2.0 million ingross proceeds (with net proceeds of approximately $1.8 million) through thesale of a 120 day secured term note. In accordance with the terms of the note,the note was payable by the Company in cash during the first 120 days followingthe issuance of the note, and after the 120 day period it was payable in theamount of $62,500 per month in cash or convertible into the common stock, $0.01par value per share, of the Company at a fixed conversion price of $1.05 pershare. In connection with the financing, the Company paid certain costs andexpenses of Laurus and has issued an immediately exercisable warrant with termsrestricting exercise. The Laurus warrant provides for the purchase of 85,000shares of common stock at a price of $1.22 per share. The warrant expires sevenyears after issuance. A finder for the transaction has received a fee of 5% ofthe gross proceeds of the offering, together with a seven year warrant topurchase an aggregate of 8,500 shares of common stock immediately exercisableat a price of $1.22 per share. This offering was conducted as a privateplacement pursuant to the exemption from registration provided by Section 4(2)of the Securities Act of 1933, as amended, and the rules and regulationspromulgated thereunder. With respect to the transaction with Laurus, theCompany has entered into an agreement to register the common stock underlyingthe warrants and the common stock that may be received upon any conversion ofthe secured term note.  On October 5,2005 proceeds from the SigmaTel transaction were used to repay in full $2.1million owed to Laurus Master Fund, Ltd. See Subsequent Events — Note 13.

 

**2.         Summary of Significant Accounting Policies**

 

***RevenueRecognition***

 

The Company recognizes revenue inaccordance with Securities and Exchange Commission Staff Accounting BulletinNo. 104 (“SAB 104”), “Revenue Recognition in Financial Statements: RevenueRecognition”, which states that revenue should be recognized when the followingrevenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product hasbeen shipped and the customer takes ownership and assumes the risk of loss; (3)the selling price is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured.  Thefollowing policies apply to the Company’s major product sales categories forrevenue recognition.

 

Sales to OEM Customers:  Revenueis recognized under the Company’s standard terms and conditions of sale, titleand risk of loss transfer to the customer at the time products are shipped tothe customer or the customers’ representative/freight forwarder (shipping termsEx Works).  The Company has experiencedminimal warranty or other returns and based upon historical experience, hasrecorded a $10,000 provision for such returns.

 

Sales to Distributors:  Atcertain times the Company provides incentives such as stock rotation, priceprotection and other incentives to its Distributors.  Therefore, under the sell throughmethod of revenue recognition the Company defers recognition of revenue untilsuch time that the distributor sells products to itscustomers based upon receipt

 

7

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of point-of-sale reports from the distributors. Distributor paymentsreceived before revenue is recognized is recorded as deferred revenue.  Unsold inventory held at distributors isincluded as a component of finished goods inventory.   See Note 12 on the Company’s adoption of thesell through method.

 

In addition, the Company records royalty revenue when earned inaccordance with the underlying agreements, which are based upon sales ofproducts commercialized from the Company’s licensed technology. Consultingrevenue is recognized as services are performed in accordance with the terms ofthe underlying consulting agreements.

 

***Loss Per Share***

 

Basic loss per share is computed by dividing thenet loss attributable to common stockholders for the period by the weightedaverage number of shares of common stock outstanding during the period.  Diluted net loss per share is computed basedon the weighted average number of shares of common stock and shares of commonstock issuable upon the exercise of stock options and common stock warrants.

 

***Research andDevelopment***

 

Costs for research and development are expensed asincurred.

 

***Inventories***

 

Inventories, including inventory held at distributors (See Note 4) arestated at the lower of cost on a first-in, first-out basis or market.  This policy requires the Company to makeestimates regarding the market value of the Company’s inventory, including anassessment of excess or obsolete inventory. The Company determines excess and obsolete inventory based on anestimate of the future demand and estimated selling prices for the Company’sproducts within a specified time horizon, generally 12 to 24 months. Theestimates the Company uses for expected demand are also used for near-termcapacity planning and inventory purchasing and are consistent with the Company’srevenue forecasts.  Actual demand andmarket conditions may differ from those projected by the Company’s management.

 

If the Company’s unit demand forecast is less than the Company’scurrent inventory value, the Company will be required to take additional excessinventory charges or write-downs to net realizable value which will decreasethe Company’s gross margin and net operating results in the future.  During the three and nine months endedSeptember 30, 2005, the Company recorded a provision for inventory losses ofapproximately $255,000 and $576,000, respectively, to account for slow moving,excess and obsolete inventory, including inventories to be delivered onnon-cancelable purchase commitments***.***

 

***Purchase commitmentlosses***

 

TheCompany accrues for estimated losses on non-cancelable purchase orders.  The estimated losses result from anticipatedfuture sale of products for sales prices less than the estimated cost tomanufacture.  For the nine months endedSeptember 30, 2005, the Company has allocated approximately $400,000 of thetotal $1.7 million of excess inventory and obsolescence reserve againstnon-cancelable purchase commitments of approximately $1.2 million at September30, 2005.  There was no such allocationat September 30, 2004.

 

 

8

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***Property andEquipment***

 

Major replacements and betterments of equipmentare capitalized.  Cost of normalmaintenance and repairs is charged to expense as incurred.  Depreciation is provided over the estimateduseful lives of the assets using accelerated methods.  Leasehold improvements are amortized overeither the term of lease or the estimated useful life of the improvement.

 

***Patents***

 

Costs incurred to register and obtain patents are capitalized andamortized on a straight-line basis over five years, their estimated usefullives.

 

***Use ofEstimates in Financial Statements***

 

In preparing financial statements in conformitywith generally accepted accounting principles, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date offinancial statements, and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

***Cash and CashEquivalents***

 

The Company considers all highly liquidinvestments with an original maturity of three months or less to be cashequivalents.

 

***Accounts Receivable***

 

The Company carries its accounts receivable from directcustomers at cost less an allowance for doubtful accounts to ensure that tradereceivables are carried at net realizable value.  On a periodic basis, the Company evaluatesthe collectibility of its accounts receivable on a variety of factors, includinglength of time receivables are past due, indication of customer willingness topay, significant one-time events and historical experience. An additionalreserve for individual accounts is recorded when the Company becomes aware of acustomer’s inability to meet its financial obligations, such as in the case ofbankruptcy filings or substantial deterioration in the customer’s operatingresults or financial position. If thefinancial condition of the Company’s customers were to deteriorate, resultingin an impairment of their ability to make payments, additional allowances maybe required.  Accounts receivable aregenerally considered past due if any portion of the receivable balance isoutstanding for more than 90 days.   Ifcircumstances related to the Company’s customers change, estimates of therecoverability of receivables would be further adjusted.

 

***Fair value of financial instruments***

 

Carrying amounts of certain of the Company’s financial instruments,including cash and cash equivalents, accounts receivable and notes and accountspayable, approximate their fair values due to their relative short maturitiesand based upon comparable market information available at the respectivebalance sheet dates. The Company does not hold or issue financial instrumentsfor trading purposes.

 

 

9

----

 

**3.         Pro-forma Information — Stock Options**

 

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

** **

The following tables illustrate the effect on net loss and loss pershare if the Company had applied the fair value recognition provisions of FAS123 to stock-based employee compensation.

** **

 
| ** **                                                                                                               | ** ** | **Nine Months Ended**         | ** **     |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|----------------|
| ** **                                                                                                               | ** ** | **September 30, (Unaudited)** | ** **     |
| ** **                                                                                                               | ** ** | **2005**                      | ** **     | **2004** | ** ** |
| ** **                                                                                                               | ** ** | ** **                    | ** **     | **(Restated)** | ** ** |
|                                                                                                                     |       |                          |           |   |   |
| Net loss, as reported                                                                                                    | ** ** | **$**                         | **(4,613,874** | ) | $ | (1,628,930 | ) |
|                                                                                                                     |       |                          |           |   |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards * | ** ** | **(1,509,818**                | )              | (3,782,346 | ) |
|                                                                                                                     |       |                          |           |   |   |
| Pro-forma net loss **                                                                                                    | ** ** | **$**                         | **(6,123,692** | ) | $ | (5,411,276 | ) |
| Loss per share:                                                                                                          |       |                          |           |   |   |
|                                                                                                                     |       |                          |           |   |   |
| As reported, basic and diluted                                                                                           | ** ** | **$**                         | **(0.39**      | ) | $ | (0.14 | ) |
|                                                                                                                     |       |                          |           |   |   |
| Pro-forma, basic and diluted                                                                                             | ** ** | **$**                         | **(0.52**      | ) | $ | (0.47 | ) |

 

 
| ** **                                                                                                               | ** ** | **Three Months Ended**        | ** **     |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|----------------|
| ** **                                                                                                               | ** ** | **September 30, (Unaudited)** | ** **     |
| ** **                                                                                                               | ** ** | **2005**                      | ** **     | **2004** | ** ** |
| ** **                                                                                                               | ** ** | ** **                    | ** **     | **(Restated)** | ** ** |
| Net loss, as reported                                                                                                    | ** ** | **$**                         | **(1,576,608** | ) | $ | (448,882 | ) |
|                                                                                                                     |       |                          |           |   |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards * | ** ** | **(445,550**                  | )              | (777,549 | ) |
|                                                                                                                     |       |                          |           |   |   |
| Pro-forma net loss **                                                                                                    | ** ** | **$**                         | **(2,022,158** | ) | $ | (1,226,431 | ) |
| Loss per share:                                                                                                          |       |                          |           |   |   |
|                                                                                                                     |       |                          |           |   |   |
| As reported, basic and diluted                                                                                           | ** ** | **$**                         | **(0.13**      | ) | $ | (0.06 | ) |
|                                                                                                                     |       |                          |           |   |   |
| Pro-forma, basic and diluted                                                                                             | ** ** | **$**                         | **(0.17**      | ) | $ | (0.11 | ) |
|                                                                                                                          |            |                               |                |  |  |  |  |  |

----

*              All awards refers to awards granted, modified, orsettled in fiscal periods beginning after December 15, 1994 - awards for whichthe fair value was required to be measured under FAS 123.

 

**           For purposes of pro-forma disclosures, the estimated fairvalue of the options is amortized over the options’ vesting period.  Pro-forma information regarding earnings andper share information is required by FAS 123, and has been determined as if theCompany had accounted for its employee stock options under the fair valuemethod of that Statement.  The fair valueof these options was estimated at the date of grant using a Black-Scholesoption pricing model for years subsequent to 2000.  Prior to 2001, the fair value of the optionswas valued using the minimum value method.

 

**4.        Inventories**

 

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

                                    
| ** **                                                  | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|-------------------|---------------|------------------|------------|
| ** **                                                  | ** ** | **2005**          | ** **    | **2004**         | ** ** |
| ** **                                                  | ** ** | **(Unaudited)**   | ** **    | **(Audited)**    | ** ** |
|                                                        |       |              |          |             |       |
| Raw materials                                               | ** ** | **$**             | **22,430**    |             | $          | 24,539 |   |
| Finished goods                                              | ** ** | **2,335,484**     |          | 2,143,530        |       |
| Finished goods held at  distributors                        | ** ** | **1,147,940**     |          | 1,734,955        |       |
|                                                        |       |              |          |             |       |
| ** **                                                  |       | **$**             | **3,505,854** |             | $          |  3,903,024 |   |
|                                                        |       |              |          |             |       |
| Less reserve for slow moving, excess and obsolete inventory | ** ** | **(1,753,954**    | )             | (1,177,716       | )          |
|                                                        |       |              |          |             |       |
| Net Inventory                                               | ** ** | **$**             | **1,751,900** |             | $          | 2,725,308 |   |
|                                                             |            |                   |               |                  |            |  |  |  |  |  |

 

**5.        Property and Equipment**

 

Property and equipment at September 30, 2005 and December 31, 2004 are comprised of thefollowing:

 
| ** **                    | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|-------------|------------------|------------|
| ** **                    | ** ** | **2005**          | ** **  | **2004**         | ** ** |
| ** **                    | ** ** | **(Unaudited)**   | ** **  | **(Audited)**    | ** ** |
|                          |       |              |        |             |       |
| Equipment                     | ** ** | **$**             | **448,706** |             | $          | 390,342 |   |
| Software                      | ** ** | **35,634**        |        | 35,634           |       |
| Furniture and fixtures        | ** ** | **36,472**        |        | 31,210           |       |
| Leasehold improvements        | ** ** | **22,954**        |        | 22,954           |       |
|                          |       |              |        |             |       |
| ** **                    |       | **$**             | **543,766** |             | $          | 480,140 |   |
|                          |       |              |        |             |       |
| Less accumulated depreciation | ** ** | **(427,240**      | )           | (376,951         | )          |
|                          |       |              |        |             |       |
| ** **                    |       | **$**             | **116,526** |             | $          | 103,189 |   |
|                               |            |                   |             |                  |            |  |  |  |  |

 

Depreciation expense was $19,047 and $50,289 forthe three and nine months ended September 30, 2005, respectively.

 

 

10

----

 

 

The estimateduseful lives of the classes of physical assets were as follows:

 
|   |   | **Description**        | ** ** | **Depreciable Lives** |
|--------|--------|------------------------|------------|-----------------------|
|   |   |                   |       |                  |
|   |   | Equipment              |       | 5 years               |
|   |   | Software               |       | 3 years               |
|   |   | Furniture and fixtures |       | 7 years               |
|   |   | Leasehold improvements |       | Term of lease         |

 

**6.****                         ****Accrued Expenses**

                                    
| ** **                             | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------|------------|-------------------|-------------|------------------|------------|
| ** **                             | ** ** | **2005**          | ** **  | **2004**         | ** ** |
| ** **                             | ** ** | **(Unaudited)**   | ** **  | **(Audited)**    | ** ** |
|                                   |       |              |        |             |       |
| Accrued audit and  accounting expenses | ** ** | **$**             | **176,800** |             | $          | 165,000 |   |
| Accrued legal expenses                 | ** ** | **423,000**       |        | 37,000           |       |
| Other accrued expenses                 | ** ** | **9,000**         |        | 10,000           |       |
|                                   |       |              |        |             |       |
| ** **                             |       | **$**             | **608,800** |             | $          | 212,000 |   |
|                                        |            |                   |             |                  |            |  |  |  |

 

**7.****                         ****Deferred Contract Revenue**

 

During September 2004, the Company entered into afunding agreement with United Binational Industrial Research and Development (“BIRD”)Foundation of Israel.  This agreementwill provide funds to the Company for industrial research and developmentactivities.  The agreement will provideup to a maximum of $560,000 of which the Company will may receive $280,000, andanother partner in the agreement will receive the remainder.  The Company has recorded $101,379 in deferredcontract revenue and for the nine months ended September 30, 2005 recorded$23,101 as an offset to research and development expenses.  There was no revenue recorded under thisagreement for the three months ended September 30, 2005.

** **

**8.****                         ****Stockholders’ Equity**

 

***Stock Options***

 

During the three months ended September30, 2005, no options to purchase shares of common stock under the 1997Employee, Director and Consultant Stock Option Plan were approved by the Boardof Directors.

** **

** **

**9.        Related Party Transactions**

 

The Company rents its facility from an entity controlled by astockholder for $4,400 per month pursuant to a lease that expires on December31, 2005.  See Liquidity - Note 1 - foradditional related party transactions.

** **

** **

** **

**11**

----

** **

**10.       License Agreement**

 

On February 13, 2001, the Company signed an exclusive license agreementwith ST Microelectronics NV (“ST”) of the Netherlands.  The agreement calls for ST to use certainintellectual property rights owned or controlled by the Company tocommercialize and sell related products utilizing such technology.  In consideration for this license, ST paid tothe Company a one-time license fee of $1.6 million in cash and a $400,000credit for future design services completed in 2004.

 

The Company received royalties based on certain formulas, as defined inthe agreement.  Royalties wereearned based upon shipments by ST of commercialized products that incorporatedtechnology licensed to ST by the Company. Royalty income has been recognized during the period in which theroyalties are earned.  Shipments havebeen reported to the Company using a “Royalty Schedule,” which is receivedwithin 30 days of quarter end.  Royaltiesare determined based upon either a percentage of selling price or a flat ratedepending on the particular product.  This agreementhas no expiration date; however, either party may cancel the agreement uponadvance notice in certain circumstances as defined in the agreement.  Total royalties received under this Agreementwere approximately $208,800 and $460,100 for the three and nine months endedSeptember 30, 2005.   For the restatedthree and nine months ended September 30, 2004 total royalties received wereapproximately $446,000 and $890,400, respectively.

 

On May 3, 2005, the Company signed an amendment to the licenseagreement with ST, whereby; 1) the DDX technology license rights were changedfrom an exclusive license to a non-exclusive license, 2) the license royaltyterms were modified and 3) terms related to Apogee interest transfers weremodified. The effective date for terms 1 and 3 above was January 1, 2005 andfor item 2 was January 1, 2004.

 

On October 5, 2005 theCompany sold its stream of royalty payments, under the ST license agreement, asa part of the transactions with SigmaTel more fully set forth below in Note 13.

 

**11.       Concentrations**

 

During the three months ended September 30, 2005, the Company derivedapproximately 12% of its total revenue from one end user and 41% of totalrevenue as a result of sell through by two distributors.

** **

During the three months ended September 30, 2005, the Company derivedapproximately 16% of its product revenue from one end user and 64% of productrevenue as a result of sell through by three distributors.

** **

During the nine months ended September 30, 2005, the Company derivedapproximately 25% of its total revenue from two end users and 43% of totalrevenue as a result of sell through by two distributors.

** **

During the nine months ended September 30, 2005, the Company derivedapproximately 22% of its product revenue from 1 end user and 44% of productrevenue as a result of sell through by 2 distributors.

 

During the restated three months ended September 30, 2004, the Company derived approximately 22% of itstotal revenue from one end user and 55% of total revenue as a result of sellthrough by two distributors.

** **

During the restated three months ended September 30, 2004, the Company derived approximately 12% of its productrevenue from one end user and 79% of product revenue as a result of sellthrough by two distributors.

** **

During the restated nine months ended September 30, 2004, the Company derived approximately 36% of its totalrevenue from two end users and 34% of total revenue as a result of sell throughby two distributors.

** **

** **

**12**

----

** **

** **

During the restated nine months ended September 30, 2004, the Company derived approximately 22% of itsproduct revenue from one end user and 48% of product revenue as a result ofsell through by two distributors.

** **

During the three months ended September 30, 2005, the Company derivedapproximately 70% and 14% of its total revenue from end users or distributorslocated in Asia and Europe, respectively.

** **

During the three months ended September 30, 2005, the Company derivedapproximately 91% of its product revenue from end users or distributors locatedin Asia.

** **

During the nine months ended September 30, 2005, the Company derivedapproximately 74% and 12% of its total revenue from end users or distributorslocated in Asia and Europe, respectively.

** **

During the nine months ended September 30, 2005, the Company derivedapproximately 88% of its product revenue from end users or distributors locatedin Asia.

** **

During the restated three months ended September 30, 2004, the Companyderived approximately 65% and 22% of its total revenue from end users ordistributors located in Asia and Europe, respectively.

** **

During the restated three months ended September 30, 2004, the Companyderived approximately 93% of its product revenue from end users or distributorslocated in Asia.

** **

During the restated nine months ended September 30, 2004, the Companyderived approximately 69% and 20% of its total revenue from end users ordistributors located in Asia and Europe, respectively.

** **

During the restated nine months ended September 30, 2004, the Companyderived approximately 94% of its product revenue from end users or distributorslocated in Asia.

** **

Four of the Company’s customers accounted for approximately 73% of thetotal accounts receivable balance at September 30, 2005.

** **

Three of the Company’s customers accounted for approximately 71% of the totalaccounts receivable balance at restated September 30, 2004.

** **

Three of the Company’s major vendors accounted for approximately 98% oftotal purchases for the nine months ended September 30, 2005.

** **

One of the Company’s major vendors accounted for approximately 94% oftotal purchases for the nine months ended September 30, 2004.

 

The Company maintains accounts with financial institutions.  Balances usually exceed the maximum coverage($100,000) provided by the Federal Deposit Insurance Corporation on insureddepositor accounts.

 

 

13

----

 

 

**12.          SupplementaryFinancial Information (unaudited)**

 

**Restatement ofPreviously Reported Quarterly Financial Information**

 

As a result ofmanagement’s decision to change the accounting method for recognizing productrevenue from distributors to a sell through or point of sale (POS) method andthe internal investigation concerning the circumstances surrounding theappropriate accounting for product revenue, the Audit Committee of the Board ofDirectors has determined that the Company restate certain financial informationpreviously reported in the Company’s Form 10-QSB for the quarters ended March31, 2004, June 30, 2004 and September 30, 2004.

 

The followingtable provides a reconciliation of amounts previously reported in the Company’sForm 10-QSB for the quarter ended September 30, 2004 with amounts previouslyadjusted for the restatement as a result of the change in accounting policy andas a result of the Audit Committee’s investigation.  In reviewing the restated ConsolidatedStatement of Operations, it should be taken into consideration that therestated financial information reflects unaudited adjustments.

 

**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARY**

 **RESTATED CONSOLIDATEDBALANCE SHEET (unaudited)**

**(in thousands)**

** **
| ** **                                 | ** ** | **September 30, 2004** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **Previously**                   | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                 | ** ** | **Reported(1)**                  | ** ** | **Adjustment** | ** ** | **Total** | ** ** |
| **ASSETS**                                 |       |                             |       |   |   |   |   |
| **Current assets**                         |       |                             |       |   |   |   |   |
| Cash and cash equivalents                  | ** ** | **$**                            | **2,511**  | ** ** | **$** | **—** | ** ** | **$** | **2,511** | ** ** |
| Accounts receivable,  net(2)               | ** ** | **3,297**                        | ** ** | **(2,247** | **)** | **1,050** | ** ** |
| Inventories, net(3)                        | ** ** | **1,845**                        | ** ** | **1,404** | ** ** | **3,249** | ** ** |
| Prepaid expenses and other  current assets | ** ** | **221**                          | ** ** | **—** | ** ** | **221** | ** ** |
| Deferred tax asset(4)                      | ** ** | **195**                          | ** ** | **(195** | **)** | **—** | ** ** |
| Total current assets                       | ** ** | **8,069**                        | ** ** | **(1,038** | **)** | **7,031** | ** ** |
| **Property and equipment, net**            | ** ** | **114**                          | ** ** | **0** | ** ** | **114** | ** ** |
| **Other assets**                           |       |                             |       |   |   |   |   |
| Patents, net                               | ** ** | **109**                          | ** ** | **—** | ** ** | **109** | ** ** |
| Other intangible assets(5)                 | ** ** | **173**                          | ** ** | **(59** | **)** | **114** | ** ** |
| ** **                                 | ** ** | **$**                            | **8,465**  | ** ** | **$** | **(1,097** | **)** | **$** | **7,368** | ** ** |
| **Current liabilities**                    |       |                             |       |   |   |   |   |
| Accounts payable and  accrued expenses     | ** ** | **$**                            | **1,606**  | ** ** | **$** | **—** | ** ** | **$** | **1,606** | ** ** |
| Deferred distributor  revenue(6)           | ** ** | **—**                       | ** ** | **1,354** | ** ** | **1,354** | ** ** |
| Deferred contract revenue                  | ** ** | **96**                           | ** ** | **—** | ** ** | **96** | ** ** |
| Deferred warranty                          | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** |
| Total current liabilities                  | ** ** | **1,702**                        | ** ** | **1,354** | ** ** | **3,056** | ** ** |
| **Stockholders’ equity**              |       |                             |       |   |   |   |   |
| Common stock                               | ** ** | **118**                          | ** ** | **—** | ** ** | **118** | ** ** |
| Additional paid-in capital                 | ** ** | **18,074**                       | ** ** | **—** | ** ** | **18,074** | ** ** |
| Accumulated deficit                        | ** ** | **(11,429**                      | **)**      | **(2,451** | **)** | **(13,880** | **)** |
| Total stockholders’ equity            | ** ** | **6,763**                        | ** ** | **(2,451** | **)** | **4,312** | ** ** |
| ** **                                 | ** ** | **$**                            | **8,465**  | ** ** | **$** | **(1,097** | **)** | **$** | **7,368** | ** ** |

 

 

14

----

 

**Restatement ofPreviously Reported Quarterly Financial Information**

 

(1)   As previously reported in theCompany’s Quarterly Reports on Form 10-QSB.

 

(2)   Accounts Receivable:  Restatement for September 30, 2004 consistsof $2,247,000 reduction associated with the deferred revenue utilizing the sellthrough method.

 

(3)   Inventory:  Restatement for September 30, 2004 representsan increase of $2,174,000 for finished goods inventory held atdistributors.  This amount was adjustedby $770,000 of reserves against inventory held at distributors and in-house.

 

(4)   Deferred Tax Asset: The $195,000 originallyrecorded for the fiscal year ended December 31, 2003 was deemed no longerapplicable based upon restatement of the Fiscal Year ended December 31, 2003.

 

(5)   Other Intangible Assets: The $59,000 adjustmentreflects with expensing of various items previously being amortized.

 

(6)  Deferred Distributor Revenue:  The restatement reflects the change inrecognition of reporting distributor revenue to a sell through or point of salemethod of accounting revenue.  Thisnumber is based on POS reports received by the Company’s distributors.

 

 

 

 

15

----

 

**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARY**

**RESTATED CONSOLIDATED STATEMENT OFOPERATIONS (unaudited)**

**(in thousands, except per share data)**

 

 

 
| ** **                                                          | ** ** | **Three Months Ended September 30, 2004** | ** **  |
|---------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                          | ** ** | **Previously**                            | ** **  | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                                          | ** ** | **Reported(1)**                           | ** **  | **Adjustment** | ** ** | **Total** | ** ** |
| **Revenues**                                                        | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Product sales(2)                                                    | ** ** | **$**                                     | **1,133**   | ** ** | **$** | **257** | ** ** | **$** | **1,390** | ** ** |
| Royalties(3)                                                        | ** ** | **790**                                   | ** **  | **(344** | **)** | **446** | ** ** |
| Consulting                                                          | ** ** | **161**                                   |        | — | ** ** | **161** | ** ** |
| ** **                                                          | ** ** | **2,084**                                 | ** **  | **(87** | **)** | **1,997** | ** ** |
| **Costs and expenses**                                              | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Product sales(4)                                                    | ** ** | **760**                                   | ** **  | **394** | ** ** | **1,154** | ** ** |
| Research and development                                            | ** ** | **664**                                   | ** **  | **-.-** | ** ** | **664** | ** ** |
| Selling, general and administrative(5)                              | ** ** | **988**                                   | ** **  | **(355** | **)** | **633** | ** ** |
| ** **                                                          | ** ** | **2,412**                                 | ** **  | **39** | ** ** | **2,451** | ** ** |
| **Operating loss**                                                  | ** ** | **(328**                                  | **)**       | **(126** | **)** | **(454** | **)** |
| **Other (expense) income**                                          | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                    | ** ** | —                                    | ** **  | — | ** ** | — | ** ** |
| Interest income                                                     | ** ** | **5**                                     | ** **  | — | ** ** | **5** | ** ** |
| ** **                                                          | ** ** | **5**                                     | ** **  | — | ** ** | **5** | ** ** |
| **Net Income (Loss) before Taxes**                                  | ** ** | **(323**                                  | **)**       | **(126** | **)** | **(449** | **)** |
| **Income Tax Benefit**                                              | ** ** | —                                    | ** **  | — | ** ** | — | ** ** |
| **Net (Loss) Income**                                               | ** ** | **(323**                                  | **)**       | **(126** | **)** | **(449** | **)** |
| Accumulated deficit -  beginning                                    | ** ** | **(11,107**                               | **)**       | **(2,324** | **)** | **(13,431** | **)** |
| **Accumulated deficit - ending**                                    | ** ** | **$**                                     | **(11,429** | **)** | **$** | **(2,450** | **)** | **$** | **(13,880** | **)** |
| **Basic and diluted loss per  common share**                        | ** ** | **$**                                     | **(0.03**   | **)** | **$** | **(0.03** | **)** | **$** | **(0.06** | **)** |
| **Weighted average common shares outstanding -  basic and diluted** | ** ** | **11,566**                                | ** **  | ** ** | ** ** | ** ** | ** ** |
|                                                                     |            |                                           |             |  |  |  |  |  |  |  |  |  |  |

 

 

16

----

 

 

 

**Restatement ofPreviously Reported Quarterly Financial Information**

 

(1)   As previously reported in the Company’s QuarterlyReports on Form 10-QSB.

 

(2)    Product Sales:  The restated number reflect the change inrecognition of reporting of distributor revenue to a sell through or point ofsale method of accounting and is based on reports from the Company’sdistributors.  This change translatedinto a net increase of $257,000 for the three months ended September 30, 2004.

 

(3)   RoyaltyRevenue:  The restated royalty revenuereflects the net effect of the discount given to STMicroelectronics forspecific customers of $344,000 for the three months ended September 30,2004.   These discounts were originallyrecorded in SG & A as a royalty expense.

 

 (4)    Costof Product Sales:  The restated numbersreflect the change in the cost of goods sold based on the change in recognitionof reporting of distributor revenue to a sell through or point of sale methodof accounting.

 

(5)     Selling, General andAdministrative:  The $355,000 reductionin SG&A was the result of the restatement of the royalty expense associatedwith discounts given to STMicroelectronics for specific customer.  These discounts have been restated againstroyalty revenue for the three months ended September 30, 2004.  In addition there was a reduction of $11,000as a result of the recording of these commissions in a prior quarter.

 

 

17

----

 

 

**Restatement of Previously Reported QuarterlyFinancial Information**

** **

**APOGEE TECHNOLOGY, INC.AND SUBSIDIARY**

**RESTATED CONSOLIDATEDSTATEMENT OF OPERATIONS (unaudited)**

**(in thousands, except pershare data)**

** **

 
| ** **                                                          | ** ** | **Nine****Months Ended September 30, 2004** | ** **  |
|---------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                          | ** ** | **Previously**                              | ** **  | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                                          | ** ** | **Reported(1)**                             | ** **  | **Adjustment** | ** ** | **Total** | ** ** |
| **Revenues**                                                        | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Product sales(2)                                                    | ** ** | **$**                                       | **3,866**   | ** ** | **$** | **63** | ** ** | **$** | **3,928** | ** ** |
| Royalties(3)                                                        | ** ** | **1,601**                                   | ** **  | **(711** | **)** | **890** | ** ** |
| Consulting                                                          | ** ** | **615**                                     | ** **  | **50** | ** ** | **665** | ** ** |
| ** **                                                          | ** ** | **6,082**                                   | ** **  | **(598** | **)** | **5,483** | ** ** |
| **Costs and expenses**                                              | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Product sales(4)                                                    | ** ** | **2,500**                                   | ** **  | **742** | ** ** | **3,240** | ** ** |
| Research and development                                            | ** ** | **1,981**                                   | ** **  | **—** | ** ** | **1,982** | ** ** |
| Selling, general and administrative(5)                              | ** ** | **2,628**                                   | ** **  | **(722** | **)** | **1,906** | ** ** |
| ** **                                                          | ** ** | **7,109**                                   | ** **  | **20** | ** ** | **7,128** | ** ** |
| **Operating loss**                                                  | ** ** | **(1,027**                                  | **)**       | **(618** | **)** | **(1,645** | **)** |
| **Other (expense) income**                                          | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                    |       | —                                      |        | — |   | — |   |
| Interest income                                                     | ** ** | **16**                                      | ** **  | **—** | ** ** | **16** | ** ** |
| ** **                                                          | ** ** | **16**                                      | ** **  | **—** | ** ** | **16** | ** ** |
| **Net Income (Loss) before Taxes**                                  | ** ** | **(1,011**                                  | **)**       | **(618** | **)** | **(1,629** | **)** |
| **Income Tax Benefit**                                              |       | —                                      |        | — |   | — |   |
| **Net (Loss) Income**                                               | ** ** | **(1,011**                                  | **)**       | **(618** | **)** | **(1,629** | **)** |
| Accumulated deficit -  beginning                                    | ** ** | **(10,418**                                 | **)**       | **(3,462** | **)** | **(13,880** | **)** |
| **Accumulated deficit - ending**                                    | ** ** | **$**                                       | **(11,429** | **)** | **$** | **(4,080** | **)** | **$** | **(15,509** | **)** |
| **Basic and diluted loss per  common sha**                          | ** ** | **$**                                       | **(0.09**   | **)** | **$** | **(0.05** | **)** | **$** | **(0.14** | **)** |
| **Weighted average common shares outstanding -  basic and diluted** | ** ** | **11,429**                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
|                                                                     |            |                                             |             |  |  |  |  |  |  |  |  |  |  |  |

 

 

18

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**Restatement ofPreviously Reported Quarterly Financial Information**

 

(1)    As previously reported inthe Company’s Quarterly Reports on Form 10-QSB.

 

(2)    Product Sales:  The restated number reflect the change inrecognition of reporting of distributor revenue to a sell through or point ofsale method of accounting and is based on reports from the Company’sdistributors.  This change translatedinto a net increase of $63,000 for the nine months ended September 30, 2004.

 

(3)   RoyaltyRevenue:  The restated royalty revenuereflects the net effect of the discount given to ST for specific customers of $711,000for the nine months ended September 30, 2004.  These discounts were originally recorded in SG & A as a royaltyexpense.

 

 (4)    Costof Product Sales:  The restated numbersreflect the change in the cost of goods sold based on the change in recognitionof reporting of distributor revenue to a sell through or point of sale methodof accounting.

 

(5)     Selling, General andAdministrative:  The $722,000 reductionin SG& A was the result of the restatement of the royalty expenseassociated with discounts given to STMicroelectronics for specificcustomer.  These discounts have beenrestated against royalty revenue for the nine months ended September 30,2004.  In addition there was a reductionof $11,000 as a result of the recording of commissions in a prior quarter.

 

**13.          Subsequent Events**

** **

On October 5, 2005, ApogeeTechnology, Inc. (the “Company”) completed a transaction with SigmaTel, Inc. (“SigmaTel”),whereby certain assets of the audio division were sold, including the DirectDigital Amplifier (DDX®) technology and the associated royalties from itslicense agreement with ST, to SigmaTel for approximately $9.4 million plus aone-year earn-out of potentially up to $4.5 million (the “Transaction”). Noassurance can be given that this earn-out will be realized.  In addition, the Company’s engineering andmarketing staff related to the audio division were offered positions atSigmaTel as a part of the Transaction.

 

The Company used proceedsfrom the Transaction to repay approximately $2.1 million owed to Laurus MasterFund, Ltd., pursuant to the Company’s Secured Convertible Note and the relatedSecurities Purchase Agreement dated as of August 9, 2005 and to pay certainexpenses related to the Transaction.  TheCompany intends to use the proceeds to design, develop and market its emergingline of MEMS-based products.

 

Although the Companyretained substantially all of its audio division related agreements (with theexception of the royalty rights from the license agreement with ST) and its DDXinventory, the Company intends to discontinue the operations of its audiodivision upon completing the sale of these remaining assets.

 

On October 20, 2005 proceedsfrom the SigmaTel transaction were used to repay the $250,000 loan from DavidSpiegel, a shareholder and the $250,000 loan from Herbert Stein, ChiefExecutive Officer, President and Chairman of the Board as well as all accruedinterest.

 

The Company and certain ofthe Principal Stockholders also entered into an additional IndemnificationAgreement.  The Company is authorized toindemnify the Principal Stockholders in the event any one or more of them hasto satisfy any obligations thereunder.

 

The following Table presentsthe pro-forma effect of the DDX technology sale and subsequent payment on theNotes as of September 30, 2005.

 

19

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**APOGEE TECHNOLOGY, INC.AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS(unaudited) (in Thousands)**

 
| ** **                                                                                                   | ** ** | **As Reported  September 30,  2005** | ** ** | **Effect of DDX  Sale and Note  Repayment** | ** ** | **Pro Forma  September 30,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|------------------------------------|------------|
| **ASSETS**                                                                                                   | ** ** | ** **                           | ** ** | ** **                                  | ** ** | ** **                         | ** ** |
| **Current assets**                                                                                           | ** ** | ** **                           | ** ** | ** **                                  | ** ** | ** **                         | ** ** |
| Cash and cash equivalents                                                                                    | ** ** | **$**                                | **812**    | ** **                                  | **$**      | **5,519**                          | **(1)(2)** | **$** | **6,331** | ** ** |
| Accounts receivable, net of allowance                                                                        | ** ** | **465**                              | ** ** | **—**                                  | ** ** | **465**                            | ** ** |
| Inventories, net                                                                                             | ** ** | **1,952**                            | ** ** | **—**                                  | ** ** | **1,952**                          | ** ** |
| Deferred costs other                                                                                         | ** ** | **368**                              | ** ** | **(368)**                                   | **(3)**    | **—**                         | ** ** |
| Deferred note financing costs                                                                                | ** ** | **306**                              | ** ** | **(306)**                                   | **(4)**    | **—**                         | ** ** |
| Prepaid expenses and other current assets                                                                    | ** ** | **62**                               | ** ** | **—**                                  | ** ** | **62**                             | ** ** |
| Total current assets                                                                                         | ** ** | **3,965**                            | ** ** | **4,845**                                   | ** ** | **8,810**                          | ** ** |
| **Property and equipment, net of accumulated  depreciation of $427**                                         | ** ** | **117**                              | ** ** | **(100)**                                   | **(3)**    | **17**                             | ** ** |
| **Other assets**                                                                                             | ** ** | ** **                           | ** ** | ** **                                  | ** ** | ** **                         | ** ** |
| Patent, net of accumulated amortization of $147                                                              | ** ** | **266**                              | ** ** | **(170)**                                   | **(3)**    | **96**                             | ** ** |
| Escrow                                                                                                       | ** ** | **—**                           | ** ** | **320**                                     | **(1)(3)** | **320**                            | ** ** |
| ** **                                                                                                   | ** ** | **$**                                | **4,348**  | ** **                                  | **$**      | **4,895**                          | ** ** | **$** | **9,243** | ** ** |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY (DEFICIENCY)**                                                       | ** ** | ** **                           | ** ** | ** **                                  | ** ** | ** **                         | ** ** |
| **Current liabilities**                                                                                      | ** ** | ** **                           | ** ** | ** **                                  | ** ** | ** **                         | ** ** |
| Accounts payable and accrued expenses                                                                        | ** ** | **$**                                | **1,706**  | ** **                                  | **$**      | **(676)**                          | **(1)(2)** | **$** | **1,030** | ** ** |
| Deferred distributor revenue                                                                                 | ** ** | **1,724**                            | ** ** | **-**                                       | ** ** | **1,724**                          | ** ** |
| Note payable other                                                                                           | ** ** | **2,000**                            | ** ** | **(2,000)**                                 | **(2)**    | **—**                         | ** ** |
| Officer and shareholder loans                                                                                | ** ** | **500**                              | ** ** | **(500)**                                   | **(2)**    | **—**                         | ** ** |
| Advances                                                                                                     | ** ** | **205**                              | ** ** | **(205)**                                   | **(1)**    | **—**                         | ** ** |
| Deferred contract revenue                                                                                    | ** ** | **73**                               | ** ** | **—**                                  | ** ** | **73**                             | ** ** |
| Total current liabilities                                                                                    | ** ** | **6,208**                            | ** ** | **(3,381**                                  | **)**      | **2,827**                          | ** ** |
| **Commitments and Contingencies**                                                                            | ** ** | **—**                           | ** ** | **—**                                  | ** ** | **—**                         | ** ** |
| **Stockholders' equity  (deficiency)**                                                                       | ** ** | ** **                           | ** ** | ** **                                  | ** ** | ** **                         | ** ** |
| Common stock, $.01 par value;                                                                                |       |                                 |       |                                        |       |                               |       |
| 20,000,000 shares authorized, 11,838,332 issued and outstanding at  September 30, 2005 and December 31, 2004 | ** ** | **118**                              | ** ** | **—**                                  | ** ** | **118**                            | ** ** |
| Additional paid-in capital                                                                                   | ** ** | **18,074**                           | ** ** | **—**                                  | ** ** | **18,074**                         | ** ** |
| Accumulated deficit                                                                                          | ** ** | **(20,052**                          | **)**      | **8,276**                                   | **(3)(4)** | **(11,776**                        | **)**      |
| Total stockholders' equity (deficiency)                                                                      | ** ** | **(1,861**                           | **)**      | **8,276**                                   | ** ** | **6,416**                          | ** ** |
| ** **                                                                                                   | ** ** | **$**                                | **4,348**  | ** **                                  | **$**      | **4,895**                          | ** ** | **$** | **9,243** | ** ** |

 

 

20

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| **Notes to above Balance Sheet**              | ** ** | ** **                                   | ** ** | ** **  |
|-----------------------------------------------|------------|----------------------------------------------|------------|-------------|
| **(1) The DDX sale proceeds are as follows:** | ** ** | **Gross proceeds**                           | ** ** | **$**       | **9,420** |
| ** **                                    | ** ** | **Less payoff of trade accounts payable**    | ** ** | **(661)**   |
| ** **                                    | ** ** | **Less payoff advance**                      | ** ** | **(205)**   |
| ** **                                    | ** ** | **Less escrow**                              | ** ** | **(420)**   |
| ** **                                    | ** ** | **Cash from DDX sale**                       | ** ** | **$**       | **8,134** |
| ** **                                    | ** ** | ** **                                   | ** ** | ** **  |
| **(2) Proceeds used for note repayment:**     | ** ** | **Cash from DDX sale**                       | ** ** | **$**       | **8,134** |
| ** **                                    | ** ** | **Less Laurus note**                         | ** ** | **(2,000)** |
| ** **                                    | ** ** | **Less premium on Laurus note and interest** | ** ** | **(115)**   |
| ** **                                    | ** ** | **Less shareholder notes**                   | ** ** | **(500)**   |
| ** **                                    | ** ** | **Net cash per above**                       | ** ** | **$**       | **5,519** |
| ** **                                    | ** ** | ** **                                   | ** ** | ** **  |
| **(3) Gain on DDX sale:**                     | ** ** | **Gross proceeds**                           | ** ** | **$**       | **9,420** |
| ** **                                    | ** ** | **Less assets sold**                         | ** ** | **(270)**   |
| ** **                                    | ** ** | **Less escrow reserve**                      | ** ** | **(100)**   |
| ** **                                    | ** ** | **Less deferred deal costs**                 | ** ** | **(368)**   |
| ** **                                    | ** ** | ** **                                   | ** ** | ** **  |
| ** **                                    | ** ** | **Net gain**                                 | ** ** | **$**       | **8,682** |
| ** **                                    | ** ** | ** **                                   | ** ** | ** **  |
| **(4) Loss on note payment:**                 | ** ** | **Less premium on Laurus note**              | ** ** | **$**       | **(100)** |
| ** **                                    | ** ** | **Less deferred financing costs**            | ** ** | **(306)**   |
| ** **                                    | ** ** | **Loss on note payment**                     | ** ** | **$**       | **(406)** |
| ** **                                    | ** ** | **Net gain per above**                       | ** ** | **$**       | **8,276** |
|                                               |            |                                              |            |             |  |  |  |  |

 

 

Since the Company hasgenerated substantial net operating loss carry forwards, no tax effect isexpected as a result of these transactions.

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**GENERAL**

 

The following Management’s Discussion and Analysis of the Company’sFinancial Condition and Results of Operations for the three-and nine-month periodsended September 30, 2005 and restated September 30, 2004 should be read inconjunction with the Company’s Financial Statements and related Notes includedelsewhere in this Quarterly Report on Form 10-QSB. This discussion contains, inaddition to historical statements, forward-looking statements that involverisks and uncertainties. The Company’s actual results could differsignificantly from the results discussed in the forward-looking statements.Factors that could cause or contribute to such differences include the factorsdiscussed in the section titled “Certain Risk Factors That May Affect FutureResults of Operations And Our Common Stock Price” as well as other factorsdescribed in the Company’s Annual Report on Form 10-KSB for the year ended December31, 2004. The Company does not intend to update any such forward-lookingstatements.

 

**OVERVIEW**

 

The Company hastraditionally designed, developed, and marketed silicon based productsincorporating proprietary technologies. The Company is currently in the process of evolving from an audiofocused enterprise to a Micro-Electromechanical Solutions (“MEMS”)provider.  The Company is developingnew System-on-Chip (“SOC”) products using its analog and digital circuitdesigns and MEMS technology for the consumer, automotive, communications andmedical markets. Historically, under a licensing agreement withSTMicroelectronics NV (“ST”), the Company developed intellectual property foruse in royalty bearing products produced by ST. On October 5, 2005 the Companysold its audio business to SigmaTel, Inc., through the sale of assetsassociated with Direct Digital Amplification (“DDX”®) technology,as detailed in Note 13 — Subsequent Events, and as a result will discontinueits audio division after completing the sale of its remaining audio divisionassets.   Previous to the asset sale, theCompany’s efforts had been focused as designing, developing and marketingpatented all-digital, high efficiency DDX technology Integrated Circuits (“ICs”)which are used in a range of audio applications including:  home theater systems, powered speakers, caraudio, commercial audio and PC multi-

 

 

21

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media.  The Company hastraditionally generated revenue from the sale of IC’s, IC related products,consulting work for third parties as well as royalties and license fees earnedunder the agreement with ST and other third parties.  The Company has marketed its products using aworldwide network of direct sales staff, independent sales representatives anddistributors.  A primary goal inconnection with the transition to the MEMS business is to use and leverage theexperience in technology, development, and its international sales experiencedeveloped from the years in the audio business.   Now that the Company has chosen to evolveinto a MEMS based solutions provider and due to a non-compete agreementassociated with the October 5, 2005 sale of assets, the Company has chosen toexit the audio space entirely; and by the terms of a non-compete with SigmaTel,it cannot compete in the Class D audio/amplifier business for two years. TheCompany incurred a net loss of approximately $1.6 million and $4.6 million forthe three and nine months ended September 30, 2005, as compared to a loss of approximately$449,000 and $1.6 million for the restated three and nine months endedSeptember 30, 2004.  As of September 30,2005, the Company had an accumulated deficit of approximately $20.2 million, ascompared to a deficit of approximately $15.6 million at December 31, 2004.  The Company’s net losses and accumulateddeficit (since 1995) result primarily from research costs associated with theCompany’s efforts to develop and market its DDX technology.

 

As of September 30, 2005, the Company had 36 employees.  As a result of the audio business sale, theCompany the Company has 11 employees.

 

During the three-month period ended September 30, 2005,the Company derived approximately 53% of its total revenue and 80% of itsproduct revenue from three and four customers, respectively all of which wasattributable to the audio division.  TheCompany has utilized a network of sales representatives and distributors, aswell as sales offices in China, Hong Kong, Japan and Taiwan, to support theCompany’s worldwide sales and marketing activities.  The Company is currently closing down itslocations in China and Taiwan.

 

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

 

The following selected financial data for the three-and nine-month periods ended September 30, 2005 and restated September 30, 2004have been derived from the Company’s unaudited financial statements.  Any trends reflected by the following tablemay not be indicative of future results.

 

 

 
| ** **                              | ** ** | ** **                                                        | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                              | ** ** | **For the Three-Month Period   Ended**** ****September 30,** | ** ** | **For the Nine-Month Period   Ended**** ****September 30,** | ** ** |
| ** **                              | ** ** | **2005**                                                          | ** ** | **2004**                                                         | ** ** | **2005**   | ** ** | **2004**       | ** ** |
|                                    |       | ** **                                                        | ** ** | **(Restated)**                                                   | ** ** | ** ** | ** ** | **(Restated)** |       |
| Statement of Operations  Data:          |       |                                                              |       |                                                             |       |       |       |           |       |
| Revenue                                 |       | $                                                                 | 1,520,186  |                                                             | $          | 1,995,817  |       | $              | 3,949,566  |   | $ | 5,482,983 |   |
| Costs and expenses                      |       | (3,066,056                                                        | )          | (2,450,063                                                       | )          | (8,535,375 | )          | (7,128,163     | )          |
| Other Income (expenses)                 |       | (30,738                                                           | )          | 5,365                                                            |       | (28,065    | )          | 16,249         |       |
| Net Loss                                |       | $                                                                 | (1,576,608 | )                                                                | $          | (448,881   | )          | $              | (4,613,874 | ) | $ | (1,628,931 | ) |
|                                    |       |                                                              |       |                                                             |       |       |       |           |       |
| Shares Outstanding                      |       | 11,838,332                                                        |       | 11,796,332                                                       |       | 11,838,332 |       | 11,796,332     |       |
|                                    |       |                                                              |       |                                                             |       |       |       |           |       |
| Balance Sheet Data:                     |       |                                                              |       |                                                             |       |       |       |           |       |
| Total Assets                            |       | $                                                                 | 4,148,235  |                                                             | $          | 7,367,886  |       | $              | 4,348,235  |   | $ | 7,367,886 |   |
| Stockholders’ equity  (deficiency) |       | $                                                                 | (2,059,214 | )                                                                | $          | 4,311,104  |       | $              | (2,059,214 | ) | $ | 4,311,104 |   |
| Loss per share (basic and  diluted)     |       | $                                                                 | (0.13      | )                                                                | $          | (0.06      | )          | $              | (0.39      | ) | $ | (0.14 | ) |
|                                         |            |                                                                   |            |                                                                  |            |            |            |                |            |  |  |  |  |  |  |

 

 

22

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**RESULTS OF OPERATIONS OF THE COMPANY**

 

 

The following table sets forth, for the periodsindicated, the percentage of total revenue represented by certain revenue andexpense items.  The table and thediscussion below should be read in conjunction with the consolidated financialstatements and notes thereto that appear elsewhere in this report.

 

 
| ** **                        | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                      | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | ** **                                    | ** ** | **(Restated)**                               | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                              |       |                                          |       |                                         |       |   |   |   |   |
| Product Sales                     |       | 76.16                                         | %          | 69.55                                        | %          | 84.22 | % | 71.62 | % |
| Royalties                         |       | 13.97                                         |       | 22.37                                        |       | 11.98 |   | 16.24 |   |
| Consulting/Licensing              |       | 9.87                                          |       | 8.08                                         |       | 3.80 |   | 12.14 |   |
|                              |       |                                          |       |                                         |       |   |   |   |   |
| Cost of Sales                     |       | (73.81                                        | )          | (57.79                                       | )          | (75.33 | ) | (59.09 | ) |
| Research and Development          |       | (51.66                                        | )          | (33.25                                       | )          | (58.45 | ) | (36.15 | ) |
| Sales, General and Administrative |       | (76.21                                        | )          | (31.70                                       | )          | (82.33 | ) | (34.76 | ) |
|                              |       |                                          |       |                                         |       |   |   |   |   |
| Operating Loss                    |       | (101.68                                       | )%         | (22.74                                       | )%         | (116.11 | )% | (30.00 | )% |
| Other Income (Expense)            |       | (2.02                                         | )          | 0.25                                         |       | (0.71 | ) | 0.31 |   |
| Net Loss                          |       | (103.70                                       | )%         | (22.49                                       | )%         | (116.82 | )% | (29.71 | )% |

 

Revenue

 

**TheCompany has traditionally derived its revenue from three sources: (1) productsales, which consist of merchandise sales made either directly to originalequipment manufacturers or sell through (point of sale) by distributors, allshipments are fulfilled from the Company’s warehouses in Hong Kong and/orNorwood, Massachusetts and revenue is reported net of returns;**(2)royalty revenue, which consists of royalties paid by STMicroelectronics underthe terms of the licensing agreement signed in February 2001 and (3) consultingincome related to the development of custom ICs for STMicroelectronics andother third parties who are developing DDX and non-DDX based solutions.     See Note 2 of thefinancial statements — Revenue Recognition.

** **

Total revenue declined by approximately $500,000 or24% to $1.5 million for the three months ended September 30, 2005 from therestated three months ended September 30, 2004 of approximately $2.0million.    Total revenue decreased byapproximately 28% or $1.5 million to approximately $4.0 million for the ninemonths ended September 30, 2005 from approximately $5.5 million for therestated nine months ended September 30, 2004.  This decrease in revenue was due to reduced sales tothe Company’s largest customers.

 

Revenue from the sale of the Company’s products, consistingof IC’s, as well as IC evaluation and reference boards, decreased byapproximately17% or $200,000 to approximately $1.2 million for the three monthsended September 30, 2005 from approximately $1.4 million for the restated threemonths ended September 30, 2004.  Productrevenue also decreased by approximately 15% or $600,000 to approximately $3.3million for the nine months ended September 30, 2005 as compared to $3.9million for the restated nine months ended September 30, 3004. This decrease inproduct sales was related to weakness in demand from its key customers.

 

Revenue from non-product related items accounted for approximately24% and 16% of total revenue for the three and nine months ended September 30,2005, respectively, compared to revenue from non-product related items ofapproximately 30% and 28% of total revenue for the restated nine months endedSeptember 30, 2004.  During the three andnine months ended September 30, 2005, the Company recorded royalties ofapproximately $212,000 and $473,000, compared to royalties of approximately$446,000 and $890,000 for the restated three and nine months ended September 30,2004, representing a decrease of approximately 52% and 47% for the respectiveperiods. The decrease in royalties is primarily due to the reduction in averageselling prices of the products sold by STMicroelectronics and reduced royaltyrates on certain products.  During thethree- and nine-month periods ended September 30, 2005, the Company recorded$150,000 of consulting revenue as compared to approximately $161,000 and$665,800 of consulting revenue recorded for the restated three- and nine-monthperiods ended September 30, 2004.

 

Total revenue for the threeand nine months ended September 30, 2005 and restated 2004 consisted of:

 

 

23

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| ** **      | ** ** | ** **                                                      | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **For the Three-Month Period  Ended September 30, (Unaudited)** | ** ** | **For the Nine-Month Period Ended  September 30, (Unaudited)** | ** ** |
| ** **      | ** ** | **2005**                                                        | ** ** | **2004**                                                       | ** ** | **2005**   | ** ** | **2004**       | ** ** |
| ** **      | ** ** | ** **                                                      | ** ** | **(Restated)**                                                 | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Product Revenue |       | $                                                               | 1,157,789  |                                                           | $          | 1,388,132  |       | $              | 3,326,238  |   | $ | 3,926,841 |   |
| Royalties       |       | 212,397                                                         |       | 446,415                                                        |       | 473,328    |       | 890,388        |       |
| Consulting      |       | 150,000                                                         |       | 161,270                                                        |       | 150,000    |       | 665,754        |       |
|            |       |                                                            |       |                                                           |       |       |       |           |       |
| Total:          |       | $                                                               | 1,520,186  |                                                           | $          | 1,995,817  |       | $              | 3,949,566  |   | $ | 5,482,983 |   |

 

Revenue from DDX products is expected to diminish over thenext few quarters as DDX inventory is sold and deferred revenue is recognizedthrough the POS reporting by distributors. In addition, licensing revenue from the ST Licensing Agreement has beenassigned in conjunction the sale of certain DDX assets.

 

It is anticipated that nominal revenue from MEMS’ relatedproducts will be generated by the end of 2005.

 

Costof Revenue

 

Cost of revenue decreased as a result of reducedproduct revenue to approximately $922,000 and $2.8 million for the three andnine months ended September 30, 2005, respectively, compared to approximately $1.2million and $3.2 million for the restated three and nine months ended September30, 2004.  Cost of revenue primarilyconsists of purchasing finished semiconductor chips and costs associated withassembly, testing and shipping of those products as well as customs and storagefees associated with warehousing a large portion of the Company’s semiconductorproducts in Asia.  In addition, theCompany has established reserves for slow moving, excess and obsoleteinventories held at Apogee and at its distributors.  These provisions are reported as part of theCost of Revenue.  Provisions for thethree and nine months ended September 30, 2005 were approximately $255,000 and$576,000 compared to approximately $278,000 and $420,000 for the restated threeand nine months ended September 30, 2004. For the three and nine months ended September 30, 2005, the Company hadgross margins before inventory reserve provisions of approximately 25% and 28%,respectively, compared to 37% and 28% in the same periods in 2004, as restated.This was due to price erosion on the sale of existing products, not offset bysales of higher margin newer products. Although the Company increased itsreserve, no inventory write-off was recorded for either the three or ninemonths ended September 30, 2005 or the restated three and nine months endedSeptember 30, 2004.  The Company ismonitoring its inventory and as of September 30, 2005, the Company believes thereserves in place are adequate but will continue to re-evaluate on a quarterlybasis or more frequently if market conditions warrant.

 

Research and Development (“R&D”) Expenses

 

Research and developmentexpenses consist primarily of salaries and related expenses in the design,development and technical support of the Company’s products as well as directsupport to current and potential customers.  Research anddevelopment expenses increased to approximately $785,000 and $2.3 million forthe three months and nine months ended September 30, 2005, compared toapproximately $664,000 and $2.0 million for the restated three and nine monthsended September 30, 2004. This increase of approximately $121,000 or 18% and$326,000 or 16%, respectively, was primarily due to the acquisition of the MEMSDivision and the related increased human resource costs of this new divisionpartially offset by a reduction in vendor expenses.  For the three and nine months ended September30, 2005 vendor expenses accounted for approximately $22,000 and $144,000 oftotal research and development costs, down from $61,000 and $294,000,respectively, for the restated three and nine month periods ended September 30,2004.  Costs related to human resourcesfor R&D were approximately $560,000 and $1.7 million for the three monthsand nine months ended September 30, 2005, compared to approximately $533,000and $1.5 million for the restated three and nine months ended September 30,2005.  This increase of $28,000 or 5% and$174,000 or 12% for the respective periods was a result of additional staffingfor the new MEMS Division partially offset by a reduction in the human resourcecosts related to the audio Division. During the nine months ended September 30, 2005, the Company introducedtwo IC products and one MEMS product. The Company continues to invest in the development of its MEMS products.Due to the technical nature of the Company’s products, engineering and designsupport are critical parts of the Company’s strategy during both thedevelopment of its products and the support to its customers from productdesign to final production.  Managementanticipates that it will continue to commit resources to research anddevelopment of MEMS related activities, but with the divestiture of the Company’sDDX Division in October 2005, R&D costs are expected to be reduced at leastfor the short term.  See SubsequentEvents — Footnote 13 to the financial statements.

 

 

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

 

Selling expenses consist primarily of salaries andrelated expenses for personnel engaged in the marketing and sales of theCompany’s products, as well as costs related to trade shows, productliterature, travel and other promotional support costs. In addition, sellingexpenses include costs of its Asian sales offices and support staff.  General and administrative costs consistprimarily of executive and administrative salaries, professional fees and otherassociated corporate expenses. The increase in SG&A was attributable principallyto professional fees as well as increased support for the Company’s Asianoffices and increased human resource costs. SG&A expenses were approximately $1.2 million and $3.3 million forthe three and nine months ended September 30, 2005, compared to approximately$632,000 and $1.9 million for the restated three and nine months endedSeptember 30, 2004, an increase of approximately $526,000 or 83% and $1.3million or 71%, respectively**. **Professional expenses increasedapproximately $425,000 or 364% and $1.1 million or 351% to approximately $542,000and $1.4 million for the three and nine months ended September 30, 2005compared to approximately $117,000 and $300,000 for the restated three and ninemonths ended September 30, 2004.  Of thisincrease for the three months and nine months ended September 30, 2005,approximately $60,000 and $500,000, respective, was due to the legal expenseassociated with the Audit Committee’s investigation and subsequent restatementof the Company’s financial statements. In addition, approximately $204,000 and $248,000 for the three and ninemonths ended September 30, 2005 was additional accounting expense related tothe Audit Committees investigation and the Company’s restatement of the itsfinancial statements.  The Companyexpects that administrative expenses will decrease now that it has becomecurrent with its SEC Filings.  InvestorRelations, Public Relations, Recruiting and Director Fees accounted for amajority of the remaining increase in professional fees. Human resource costsincreased approximately $81,000 and $126,000 to approximately $352,000 and $1.0million during the three months and nine months ended September 30, 2005compared to approximately $271,000 and $904,000 during the same periods in2004, as restated, an increase of 30% and 14%, respectively.  This increase was primarily due to highercompensation, as well as, an increase in domestic staffing. Travel expenseincreased by approximately $8,000 or 15% and $62,000 or 39% to approximately$59,000 and $221,000 for the three and nine months ended September 30, 2005compared to approximately $52,000 and $159,000 for the restated three and ninemonths ended September 30, 2004.  Inaddition, the Company increased the allowance for doubtful accounts by $15,000and $40,000 for the three and nine months ended September 30, 2005 compared to$5,000 and $10,000 increase in the allowance for the restated three and ninemonths ended September 30, 2004. Operating expenses are expected to be reduced over the next few quartersdue to a reduction of staffing and other deductions as a result of the sale ofcertain DDX assets.  This trend isexpected to continue until such time as staffing and other spending increasesin conjunction with building the MEMS business.

 

InterestIncome (Expense)

 

Interest income includes income from the Company’s cash andcash equivalents and from investments and expenses related to its financingactivities.  During the three and ninemonths ended September 30, 2005, the Company generated interest income ofapproximately $4,800 and $10,900 compared to interest income of approximately$5,400 and $16,300 during the same periods in 2004.  As a result of the loans by Laurus MasterFund, Ltd. in August 2005 and loans by Mr. Herbert M. Stein and Mr. David Spiegelin May 2005, the Company incurred interest expense of approximately $17,400 and$20,900 for the three and nine months ended September 30, 2005.  This decrease in interest income for thethree and nine months ended September 30, 2005 was primarily due to reducedinterest on reduced cash as of September 30, 2005.

 

Financing costs of $324,000 were incurred as a result of theLaurus Master Fund, Ltd. Loan and recorded as deferred financing costs as ofSeptember 30, 2005.  During the three andnine months ended September 30, 2005, the Company recorded $18,000 of financingcosts. These costs were paid in full upon completion of the SigmaTeltransaction. See Subsequent Events — Note 13 to the financial statements.

 

NetLoss

 

The Company’s net loss for the three months endedSeptember 30, 2005 was approximately $1.4 million or $0.12 per basic anddiluted common share, compared to a net loss of approximately $449,000 or $0.06per basic and diluted common share for the restated three months endedSeptember 30, 2004.  For the nine monthsended September 30, 2005 the Company reported a loss of approximately $4.4million or $0.37 per basic and diluted common share, compared to a net loss ofapproximately $1.6 million or $0.14 per basic and diluted common share for therestated nine months ended September 30, 2004.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s principal source of liquidity atSeptember 30, 2005 consisted of approximately $812,000 in cash and short-terminvestments and $2.5 million of available short term financing.  See Liquidity Section of Basis ofPresentation — Note 1 to the financial statements.  This compares to approximately $1.9 millionin cash and cash equivalents at December 31, 2004.  This decrease in cash was due to increased workingcapital requirements.

 

Net cash used in operations during the nine-monthperiod ended September 30, 2005 increased to approximately $3.4 millioncompared to approximately $1.7 million in the restated nine-month period endedSeptember 30, 2004.  The increase was mainlydue to an increase in net loss and increases in allowances for doubtfulaccounts, slow moving, excess and obsolete inventory and accounts receivablereserves.  As of September 30, 2005,inventory, net of reserves, was approximately $2.0 million compared toinventory of approximately $3.2 million as of September 30, 2004.  Net accounts receivable was approximately$465,000 at September 30, 2005, down from approximately $1.0 million atSeptember 30, 2004.  As of September 30,2005, four major customers accounted for

 

 

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approximately 73% of the total accounts receivable balance.  The Company increased its reserve against baddebts to $145,000 as of September 30, 2005 from $105,000 as of December 31,2004.  The Company believes this reserveis sufficient at this time.

 

Net cash used in investing activities for the ninemonths ended September 30, 2005 was approximately $138,000, compared toapproximately $195,000 for the restated nine months ended September 30, 2004.

 

Net cash provided by financing activities for the ninemonths ended September 30, 2005 was approximately $2.5 million, compared to$1.9 million provided by financing activities for the nine months endedSeptember 30, 2004.  During the nine-monthperiod ended September 30, 2005, the Company received the proceeds fromunsecured interest bearing loans in the amounts of $250,000 from DavidSpiegel, a shareholder and $250,000 from Herbert Stein, Chief ExecutiveOfficer, President and Chairman of the Board. These loans werepayable upon demand and were not subject to any premium or penalty forprepayment. The loan interest rate is 6% per annum, payable monthly inarrears on the outstanding balance.   On August 11, 2005, theCompany entered into agreements with Laurus Master Fund, Ltd., whereby theCompany received $2.0 million in gross proceeds (with net proceeds ofapproximately $1.8 million) through the sale of a 120 day secured term note. Inaccordance with the terms of the note, the note was payable by the Company incash during the first 120 days following the issuance of the note, and afterthe 120 day period it was payable in the amount of $62,500 per month in cash orconvertible into the common stock, $0.01 par value per share, of the Company ata fixed conversion price of $1.05 per share. In connection with the financing,the Company paid certain costs and expenses of Laurus and has issued animmediately exercisable warrant with terms restricting exercise. The Lauruswarrant provides for the purchase of 85,000 shares of common stock at a priceof $1.22 per share. The warrant expires seven years after issuance. A finderfor the transaction received a fee of 5% of the gross proceeds of the offering,together with a seven year warrant to purchase an aggregate of 8,500 shares ofcommon stock immediately exercisable at a price of $1.22 per share. Thisoffering was conducted as a private placement pursuant to the exemption fromregistration provided by Section 4(2) of the Securities Act of 1933, asamended, and the rules and regulations promulgated thereunder. With respect tothe transaction with Laurus, the Company has entered into an agreement toregister the common stock underlying the warrants and the common stock that maybe received upon any conversion of the secured term note.  On October 5, 2005 proceeds from the SigmaTeltransaction were used to repay the approximately $2.1 million owed to LaurusMaster Fund, Ltd. as well as payment of certain expenses related to thetransaction.

 

On August 24, 2004 theCompany completed a private placement to accredited third party investors underSection 4(2) of the Securities Act and Regulation D, Rule 506, promulgatedthereunder.  In connection with the privateplacement, the Company issued 374,242 shares at a price of $4.75 pershare.  The Company received net proceedsof $1,648,177 from the sale**. **During the three-month period ended September 30,2004, the Company received $58,820 in cash from the exercise of options by oneformer employee and one former director.

 

The Company believes that cash flow from operations aswell as the funds from the audio division sale — See Subsequent event — Note 13to the financial statements, as well as, amounts that may be raised from timeto time in private offerings of its common stock as well as the amounts receivedin debt financings will be sufficient to support operations and fund capitalequipment requirements at least through 2006.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of theconsolidated financial statements requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities andexpenses.  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 making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

 

The Company believes the following criticalaccounting policies affect its more significant judgments and estimates used inthe preparation of its consolidated financial statements.  The Company maintains allowances foruncollectible accounts receivable for estimated losses resulting from theinability of its customers to make required payments.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. The Company maintainsallowances for estimated slow moving, excess or obsolete inventories includingfuture non-cancelable purchase commitments based on the Company’s review ofinventory levels, projected future sales and comparison of actual manufacturingcosts to standard costs.  If actualmarket conditions are less favorable than those projected by management,additional allowances may be required. Property, plant and equipment, patents,trademarks and other intangible assets are amortized over their estimateduseful 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.

 

 

 

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The Company prepares its consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements requires us to make estimates,judgments and assumptions that we believe are reasonable based upon theinformation currently available.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the periods presented. Any future changes to these estimates and assumptions could have asignificant impact on the reported amounts of revenue, expenses, assets andliabilities in our financial statements. The significant accounting policies which we believe are the mostcritical to aid in fully understanding and evaluating our reported financialresults include the following:

 

Revenue Recognition

 

The Company recognizesrevenue in accordance with Securities and Exchange Commission Staff AccountingBulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements:Revenue Recognition, which states that revenue should be recognized when thefollowing revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product hasbeen shipped and the customer takes ownership and assumes the risk of loss; (3)the selling price is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured.  Thefollowing policies apply to the Company’s major product sales categories forrevenue recognition.

 

Sales to OEMCustomers:  Revenue is recognized underthe Company’s standard terms and conditions of sale, title and risk of losstransfer to the customer at the time products are shipped to the customer orthe customers’ representative/freight forwarder (shipping terms Ex Works).  The Company has experienced minimal warrantyor other returns and based upon historical experience, has recorded a $10,000provision for such returns.

 

Sales to Distributors:  At certain times the Company provides certainincentives such as stock rotation, price protection and other incentives to itsDistributors.  Therefore, under the sellthrough method of revenue recognition the Company defers recognition of revenueuntil such time that the distributor sells products to its customers based uponreceipt of point-of-sale reports from the distributors. Distributor paymentsreceived before revenue is recognized is recorded as deferred revenue.  Unsold inventory held at distributor isincluded as a component of finished goods inventory.   See the Company’s adoption of the sellthrough method - Note 12 to the financial statements.

 

In addition, the Company records royalty revenue whenearned in accordance with the underlying agreements which are based upon salesof products commercialized from the company’s licensed technology. Consultingrevenue is recognized as services are performed in accordance with the terms ofthe underlying consulting agreements.

 

Accounts Receivable

 

The Company performs credit evaluations of customersand determines credit limits based upon payment history, customers’ creditworthiness and other factors, as determined by the Company’s review of theircurrent credit information.  For amajority of the larger sales, the Company can require the issuance of a Letterof Credit.  Smaller accounts must eitherpay via credit card or in advance of shipment. The Company continuously monitor collections and payments fromcustomers, and maintains a provision for estimated credit losses based uponhistorical experience and any specific customer collection issues that havebeen identified.  While the Company hasnot had any significant credit losses to date, the Company cannot guaranteethat it will continue to avoid credit losses in the future.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.  Since accounts receivable are highlyconcentrated in a small number of customers, a significant change in theliquidity or financial position of any one of these customers could have amaterial adverse impact on the collectibility of the Company’s accountsreceivable, liquidity or future results of operations.  Receivables associated with deferreddistributor revenue have been reclassed and an allowance for doubtful accountsis maintained to ensure trade receivables are recorded at net realizable value.  Accounts receivable may fluctuate but areexpected to diminish as a result of selling the inventory related to the DDXbusiness.

 

Inventory

 

Apogee states its inventory at the lower of cost(first-in, first-out) or market**. **This policy requires that theCompany make certain estimates regarding the market value of the inventory,including an assessment of excess or obsolete inventory.  The Company determines excess and obsoleteinventory based on an estimated future demand and estimated selling prices forthe Company’s products within a specified time frame, which is generally 12months.  The estimates used for expecteddemand are also used for short-term capacity planning and inventory purchasingand are consistent with revenue forecasts. In addition to current inventory ofapproximately $1.8 million, net of reserve, consisting of approximately$800,000 held at Apogee and $1.0 million held at distributors, there areinventory purchase commitments of approximately $1.2 million at September 30,2005.   This compares to inventory, netof reserves, of approximately $2.7 million consisting of approximately $1.5million held at distributors with the remaining $1.2 million at Apogee atDecember 31, 2004.  The Company is in theprocess of selling off this inventory through existing and new channels,however this ability to sell may be limited as a result of a non-competeagreement associated with the sale of assets to SigmaTel. The Company isrequired to seek SigmaTel’s consent in connection with all such sales.  Actual demand and market conditions may bedifferent from those projected by management. If the unit demand forecast is less than current inventory value, theCompany will be required to take additional excess

 

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inventory charges or write-downs to net realizable value which willdecrease the gross margin as well as the net operating results in thefuture.  During the three and nine monthsended September 30, 2005, the Company recorded a provision for excess orobsolete inventory of approximately $255,000 and $576,000, respectively.  If actual market conditions are less thanfavorable than those projected by management, additional allowances may berequired.  At September 30, 2005 approximately$400,000 of the $1.7million inventory reserve balance has been allocatedagainst $1.2 million of non-cancelable purchase commitments.  Inventory for DDX parts will fluctuate but isexpected to decrease over the next few quarters.

 

Valuation of Long-Lived Assets

 

Property, plant and equipment, patents, trademarks andother intangible assets are amortized over their estimated useful lives. Usefullives are based on management’s estimates over the period that such assets willgenerate revenue. Intangible assets are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying value of an asset maynot be recoverable. Future adverse changes in market conditions or pooroperating results of underlying capital investments or intangible assets couldresult in losses or an inability to recover the carrying value of such assets,thereby possibly requiring an impairment charge in the future.

** **

**CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OFOPERATIONS AND OUR COMMON STOCK PRICE**

 

There are a number of important factors thatcould cause our actual results to differ materially from those indicated orimplied by forward-looking statements. Factors that could cause or contributeto such differences include those discussed below, as well as those discussedelsewhere in this Form 10-QSB. We disclaim any intention or obligation toupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise except as may be required by law.

 

**RISKS RELATED TO OUR BUSINESS**

 

**WE HAVE HAD A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAYNEVER ACHIEVE OR SUSTAIN PROFITABILITY.**

 

**As of September 30, 2005, the Company had a stockholder deficiency of $2.1million and had an accumulated deficit of approximately $20.3 million andworking capital deficiency of approximately $2.4 million.  The Company recorded a loss of approximately$1.6 million and $4.6 million for the three- and  nine-month periods ended September 30, 2005.  The Company recorded a net loss ofapproximately $3.4 million for the year ended December 31, 2004 and a restatednet loss of approximately $270,000 in 2003. The Company will need to generate revenue to achieve and sustainprofitability and positive cash flow. **The Company’s ability to generatefuture revenue and achieve and sustain profitability will depend on a number offactors, many of which are described throughout this risk factor section.  If we are unable to achieve and sustainprofitability, the Company’s share price would 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 nine months ended September 30,2005, the Company derived approximately 68% of its total revenue and 66% ofproduct revenue from four and three customers, respectively.  The loss of any of the Company’s customers,or a significant decrease in the amount of revenue generated from any of thesecustomers, would have a material adverse effect on its business, financialcondition and results of operations.  TheCompany is developing new customers and markets in order to diversify themarket applications of its products.

 

**WE WILL NEED TO RAISEADDITIONAL CAPITAL OR SELL ASSETS IN ORDER TO CONTINUE TO PERFORM RESEARCH ANDDEVELOPMENT AND OPERATE OUR BUSINESS, AND SUCH TRANSACTIONS MAY NOT BEAVAILABLE TO US ON FAVORABLE TERMS IF AT ALL.**

 

Because we have historically had losses and only alimited amount of cash has been generated from operations, we have funded ouroperating activities to date primarily from the sale of securities. In order tocontinue to fund the development of our business, we will need additionalcapital, either through the sale of securities or through the sale of assets.We cannot be certain that any such financing or asset sales will be availableon acceptable terms, or at all. Moreover, additional equity financing, ifavailable, would likely be dilutive to the holders of our common stock, anddebt financing, if available, would likely involve restrictive covenants. If wesell assets that are currently used in the conduct of our business, thoseassets would no longer be available to us as a potential source of revenuegeneration, as is the case with the October 5, 2005 sale of assets. If wecannot raise sufficient additional capital through means available to us, itwould adversely affect our ability to achieve our business objectives.

 

 

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**NEITHER OUR DISCLOSURE CONTROLS AND PROCEDURES NOR OURINTERNAL CONTROL OVER FINANCIAL REPORTING CAN PREVENT ALL ERRORS OR FRAUD, ANDIN THE PAST THESE CONTROLS AND PROCEDURES WERE NOT EFFECTIVE AND RESULTED INRESTATEMENTS TO OUR FINANCIAL RESULTS****.**

 

Our management does notexpect that our disclosure controls and procedures or our internal control overfinancial reporting will prevent all errors or fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system will be attained.Furthermore, the design of a control system must reflect the fact that thereare resource constraints and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in acost-effective control system, no evaluation of controls can provide absoluteassurance that all misstatements due to error or fraud, if any, may occur andnot be detected on a timely basis. These inherent limitations include thepossibility that judgments in decision-making can be faulty and that breakdownscan occur because of errors or mistakes. Our controls and procedures can alsobe circumvented by the individual acts of some persons, by collusion of two ormore people or by management override of the controls. The design of any systemof controls is based in part on certain assumptions about the likelihood offuture events and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Furthermore,controls may become inadequate because of changes in conditions or deteriorationin the degree of compliance with policies or procedures. While we seek todesign our controls and procedures to provide reasonable assurance thatinformation required to be disclosed in our periodic filings is timelydisclosed, these inherent limitations expose us to breakdowns in such controlsand procedures. For example, while our certifying officers believed that thedesign of our controls and procedures would ensure that material informationrelated to the Company would be made known to them on a timely basis, in lightof the circumstances underlying the Restatement, these controls and proceduresfor the financial statement periods covered by the Restatement were noteffective. We have made certain changes to our internal control over financialreporting that are designed to address these circumstances, although even theseimprovements to our controls and procedures cannot ensure that all errors orfraud will be prevented.

 

**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.**

 

Approximately 74% and 12% of the Company’stotal revenue for the nine months ended September 30, 2005 were to customers inAsia and Europe, respectively.  All ofthe Company’s revenue was generated in the audio business, 88% of productrevenue was from customers in Asia. Prior to the sale of certain of its assets to SigmaTel, Inc., asignificant percentage of the Company’s product revenue was to manufacturersproducing DVD Receivers.  The Companywill need to develop new markets and look to new sales channels in order toeffectively market applications of its products.  

 

**OUR MARKETSARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND, THEREFORE, OUR SUCCESS DEPENDSON OUR ABILITY TO INTRODUCE NEW PRODUCTS IN A TIMELY FASHION.**

 

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

 

•                                          identify emerging technological trends inour market;

 

•                                          identify changing consumer requirements;

 

•                                          develop or maintain competitivetechnology, 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 in developing and marketing new products thatrespond to technological and competitive developments and changingcustomer needs, or and such products may not gain market acceptance and beincorporated into the technology or products of third parties.  Any significant delay or failure to developnew enhanced technologies, including new product offerings, and any failure ofthe marketplace to accept any new technology and product offerings would have amaterial adverse effect on our business, financial condition and results ofoperations.

** **

 

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**OUR ABILITYTO ACHIEVE OR SUSTAIN REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TO FINDNEW LICENING RELATIONSHIPS OR MAINTAIN OUR EXISTING LICENSING RELATIONSHIPS.**

 

Part of our business strategy has been toexpand our licensing activities with STMicroelectronics and to enter intolicensing relationships with other companies in order to offer products to alarger customer base than could be reached through our own development andmarketing efforts.  These have primarilybeen with our audio division.  We havebelieved that such relationships can accelerate market penetration of ourproducts and technologies, while limiting our manufacturing exposure and salesand marketing costs.  However, we nolonger own the assets associated with our audio division, therefore, may not beable to expand or maintain our existing licensing relationships or establishnew licensing relationships on commercially reasonable terms, if at all.  Any future inability by us to maintain ourlicensing relationships or to enter into additional licensing relationships, orthe failure of one or more of our licensing relationships to contribute to thedevelopment and maintenance of a market for our products, could have a materialadverse effect on our business, operating results and financial condition.

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

** **

We have changed our primary line of business,we will experience fluctuations in our quarterly operating results as we havein the past and it is likely that these fluctuations will continue in thefuture.  These fluctuations are caused bymany factors, including, but not limited to:

 

•                                            availability and pricing from oursuppliers;

 

•                                            changes in the demand for our products bycustomers;

 

•                                            introductions or enhancements ofproducts, or delays in the introductions or enhancements of products, by us orour competitors;

 

•                                            rate and success of new customerdevelopment;

 

•                                            changes in our pricing policies or thoseof our competitors;

 

•                                            success in attracting, retaining andmotivating qualified personnel;

 

•                                            changes in general economic conditions;and

 

•                                            obsolescence of inventory.

 

A substantial portion of our operatingexpenses is related to personnel, facilities, and sales and marketing programsand are fixed.  Our expense level isbased in part on our expectations of future orders and sales, which areextremely difficult to predict.  Accordingly,we may not be able to adjust our fixed expenses quickly enough to address anysignificant shortfall in demand for our products in relation to ourexpectations.

 

Fluctuations in our operating results mayalso result in fluctuations in our common stock price.  In such event, the trading price of ourcommon stock would likely suffer and adversely affect our ability to raisecapital and the value of your investment in the Company.

 

**WE HAVERECENTLY REDUCED OUR WORKFORCE CONSIDERABLY, IF WE ARE UNABLE TO HIRE OR RETAINKEY PERSONNEL, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY.**

 

We may not be successful in recruiting andretaining executive officers and other key management and technicalpersonnel.  The competition for employeeswith the necessary high level of technical expertise to design, market and sellour products is intense, particularly in eastern Massachusetts and Asia.  As a result of the October 5, 2005 sale ofcertain assets to SigmaTel, Inc., will need to hire a number of additionaltechnical personnel if we are sustain the development of new products and ourability to sell those 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 and resultsof operations.  In addition, the loss ofthe management and technical expertise of our senior management could seriouslyharm us.  Our employees may also berecruited away from us by our competitors. The Company does not have in place employment contracts for some membersof its senior management, including the CFO, COO and Vice President ofEngineering.

 

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**THERE IS A NEW EUROPEAN DIRECTIVE TOELIMINATE HAZARDOUS MATERIALS IN ELECTRONIC PRODUCTS AND AS SUCH WE MAY NOT BEABLE TO TRANSITION OUR IC PRODUCTS TIMELY TO MEET CUSTOMER NEEDS AND MAY HAVEINVENTORY THAT CAN ONLY BE SOLD IN LIMITED MARKETS.**

 

The IC industry is responding to the European directive of Restrictionof Hazardous Substances (“RoHS”) that will become effective in July 2006.  As a result of this directive, semiconductorcompanies are working to remove lead and other hazardous materials used intheir IC products. The Company expects to transition all of its IC products toconform to the RoHS standard during the first half of 2005. However, theCompany may not be able to meet customer delivery requirements to support the2005 consumer electronic design cycle. In addition, the Company currently hasinventory to support European customers that may have to be sold in othermarkets.  Any excess inventory may not beable to be sold timely or at all.

 

**WE DO NOT HAVE MANUFACTURING CAPABILITIES, AND AS ARESULT, WE RELY ON OUTSIDE FOUNDRIES TO MANUFACTURE OUR SILICON BASED PRODUCTS.**

 

We have no manufacturing capabilities, nor dowe have plans to establish any such capabilities.  Accordingly, we utilize outside semiconductorfoundries, assembly and test companies to manufacture our silicon basedproducts.  There are significant risksassociated with our reliance on these foundries that can adversely affect ourbusiness, operating results and financial condition.  These risks include:

 

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

 

•                                          delays in production or shortages inproduct delivery as a result of production problems at outsidecontractors;

 

•                                          the loss of foundry priority that maylimit our ability to obtain products on schedule;

 

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

 

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

 

•                                            lack of access or control over newprocess and manufacturing technologies to maintain product competitiveness inthe market.

 

**OUR PRODUCTS USE NEW TECHNOLOGYAND MAY HAVE MANUFACTURING DEFECTS OR OTHER CHARACTERISTICS THAT ARE ONLYDETECTED AFTER INSTALLATION IN CUSTOMER APPLICATIONS, WHICH MAY HARM OURBUSINESS.**

 

Our products are based on recently developedtechnology and are manufactured using state-of-the-art manufacturingprocesses.  Our approach to productqualification and testing may not fully evaluate or identify product characteristicsor defects that could adversely affect the product’s ability to operate in theintended application.  If such defects orcharacteristics are discovered after installation, product revenue might besignificantly delayed and our ability to maintain existing customers and toretain new customers may be seriously affected.

 

**OUR ABILITYTO ACHIEVE REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TO PERSUADE THEMARKET TO ADOPT OUR TECHNOLOGIES.**

 

We face challenges in persuadingmanufacturers to adopt our products using MEMS technologies.  In order to adopt our products, manufacturersand engineers must understand and accept our new technology.  In addition, MEMS technologies may be moreexpensive or difficult to implement for some applications than traditionaltechnologies.  For these reasons,prospective customers may be reluctant to adopt our technology.

 

**INTENSECOMPETITION IN THE MEMS INDUSTRY COULD PREVENT US FROM ACHIEVING PROFITABILITY.**

 

The MEMS industry is highly competitive, andwe expect the intensity of the competition to increase. Many of our competitorshave greater financial, technical, research, marketing, sales, distribution,service and other resources than we do. Moreover, our competitors may offer broader product lines and havegreater name recognition than we do, and may offer discounts as a competitive tactic,forcing intense pricing pressure on our products.  In addition, several development stagecompanies are currently creating or 

 

 

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developing technologies and products that compete with or are beingdesigned to compete with our technologies and products.  Our competitors may develop or markettechnologies 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.

 

**OUR BUSINESSWILL SUFFER IF WE EXPERIENCE DIFFICULTIES IN INTEGRATING ANY TECHNOLOGIES,PRODUCTS OR BUSINESSES WE ACQUIRE**.

 

In May 2004, the Company acquired theintellectual property and other intangibles and hired staff from Standard MEMS,Inc. Acquisitions typically entail many risks and could result in difficultiesin integrating the operations and personnel of companies that we acquire or thetechnologies and products that we acquire. If we are not able to successfullyintegrate our acquisitions, we may not obtain the advantages that theacquisitions were intended to create, which could adversely affect our resultsof operations, financial condition and cash flows. In addition, in connectionwith acquisitions, we could experience disruption in our business or employeebase. There is also a risk that key employees of companies that we acquire orkey employees necessary to successfully commercialize technologies and productsthat we acquire may seek employment elsewhere, including with our competitors.

 

**RISKS RELATED TO OURINTELLECTUAL PROPERTY**

 

**OURINTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BE INSUFFICIENT TO PROTECT OURCOMPETITIVE POSITION.**

 

Our business depends, in part, on our abilityto protect our intellectual property.  Werely primarily on patent, copyright, trademark and trade secret laws to protectour proprietary technologies.  We cannotbe sure that such measures will provide meaningful protection for ourproprietary technologies and processes. We have acquired a portfolio of MEMS intellectual property and theCompany is reviewing this portfolio to determine which of the acquired rightswill be most useful in its business.  Wecannot be sure that any existing or future patents will not be challenged,invalidated or circumvented, or that any rights granted thereunder wouldprovide us meaningful protection.  Thefailure of any patents to provide protection to our technology would make iteasier for our competitors to offer similar products.

 

We also generally enter into confidentialityagreements with our employees and strategic partners, and generally controlaccess to and distribution of our documentation and other proprietaryinformation.  Despite these precautions,it may be possible for a third party to copy or otherwise obtain and use ourproducts or technology without authorization, develop similar technologyindependently or design around our patents. In addition, effective copyright, trademark and trade secret protectionmay be unavailable or limited in certain foreign countries in which we operate.

 

**WE MAY BESUBJECT TO INTELLECTUAL PROPERTY RIGHTS DISPUTES WHICH THAT COULD DIVERTMANAGEMENT’S ATTENTION AND COULD BE COSTLY.**

 

The 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.

 

Irrespective of the validity or successfulassertion of various claims of infringement, misappropriation or misuse ofother parties’ proprietary rights, we would likely incur significant costs anddiversion of our management and personnel resources with respect to the defenseof such claims, which could seriously harm our business.  If any claims or actions are asserted againstus, we may seek to obtain a license under a third party’s intellectual propertyrights.  We cannot be sure that undersuch circumstances a license would be available on commercially reasonableterms, if at all.  Moreover, we oftenincorporate the intellectual property of our strategic customers into ourdesigns, and we have certain obligations with respect to the non-use and non-disclosure of such intellectual property. We cannot be sure that the steps taken by us to prevent our or ourcustomers’, misappropriation or infringement of the intellectual property willbe successful.

 

 

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**RISKS RELATING TO OUR COMMONSTOCK**

 

**FACTORS UNRELATEDTO OUR BUSINESS COULD NEGATIVELY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.**

 

The stock markets have experienced extreme price andvolume fluctuations that have affected and continue to affect the market pricesof equity securities of many technology companies. These fluctuations oftenhave been unrelated or disproportionate to the operating performance of thosecompanies. We expect that the market price of our Common Stock will fluctuateas a result of variations in our quarterly operating results, or for otherreasons that are not related to the performance of our business. Thesefluctuations may be exaggerated if the trading volume of our Common Stock islow. In addition, due to the technology-intensive nature of our business, themarket price for our Common Stock may rise and fall in response to variousfactors, including:

 

•                                          announcements of technologicalinnovations or new products, or competitive developments;

 

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

 

•                                          acquisitions or strategic alliances by usor our competitors, and

 

•                                          the gain or loss of a significantcustomer or order.

 

In addition, market fluctuations, as well asgeneral economic, political and market conditions such as recessions, interestrate changes or international currency fluctuations, may negatively impact themarket price of our Common Stock.

 

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

 

The Company’s financialinstruments include: cash, cash equivalents, accounts receivable and accountspayable.  At September 30, 2005, thecarrying value of the Company’s cash, cash equivalents, accounts receivable andaccounts payable approximate fair values given the short maturity of theseinstruments.

 

Although the Company’s salesare predominately to international markets, the Company believes that it doesnot have material foreign currency exchange rate risk since international salesare in U.S. dollars and material purchases from foreign suppliers are typicallyalso denominated in U.S. dollars.  Additionally, the functional currency of the Company’s foreign salesoffices is the U.S. dollar.

 

It is the Company’s policynot to enter into derivative financial instruments for speculative purposes.

 

**ITEM 4 — CONTROLS AND PROCEDURES**

 

(a)          Evaluation ofDisclosure Controls and Procedures.  TheCompany’s chief executive officer and principal financial officer have reviewedand evaluated the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13d-15 (e) and 15d-15 (e)) as ofthe end of the period covered by this quarterly report.  Based on that evaluation, the chief executiveofficer and principal financial officer have concluded that the Company’scurrent disclosure controls and procedures are adequate and effective to ensurethat material information relating to the Company was made known to them byothers, particularly during the period in which this Quarterly Report on Form10-QSB was being prepared.

 

(b)         Changes inInternal Controls.  There were no changesin our internal control over financial reporting, identified in connection withthe evaluation of such internal control that occurred during our last fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM1 — LEGAL PROCEEDINGS**

 

In November 2004, Apogee commenced an action against NationalHybrid, Inc. (Hybrid) in the United States District Court for the EasternDistrict of New York, claiming that as part of Hybrid’s procurement of thetangible assets from the secured lien holder of the bankrupt StandardMEMS, Inc. (SMI), Hybrid had inadvertently obtained copies of files,containing in part, the intangible assets purchased by Apogee in May of 2004 aspart of its MEMS acquisition. In November 2004, the court directed Hybridnot to sell, destroy or otherwise dispose of these files.  In response, Hybrid filed a counterclaim inFebruary 2005, stating that they were the owner of the files. Thecourt has delayed any further actions on this matter until January2006 since the parties are now working to resolve the issue.  The Company believes Hybrid’sclaims are without merit. The Company expects to resolve this issuewith Hybrid, now held in estate due to the death of the prior owner, in2005, and further does not believe the resolution will be material to itsbusiness.

 

 

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**ITEM2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

On August 11, 2005, the Company entered into agreements withLaurus Master Fund, Ltd., whereby the Company received $2.0 million in grossproceeds (with net proceeds of approximately $1.8 million) through the sale ofa 120 day secured term note. In accordance with the terms of the note, the notewas payable by the Company in cash during the first 120 days following theissuance of the note, and after the 120 day period it was payable in the amountof $62,500 per month in cash or convertible into the common stock, $0.01 parvalue per share, of the Company at a fixed conversion price of $1.05 per share.In connection with the financing, the Company paid certain costs and expensesof Laurus and has issued an immediately exercisable warrant with termsrestricting exercise. The Laurus warrant provides for the purchase of 85,000shares of common stock at a price of $1.22 per share. The warrant expires sevenyears after issuance. A finder for the transaction received a fee of 5% of thegross proceeds of the offering, together with a seven year warrant to purchasean aggregate of 8,500 shares of common stock immediately exercisable at a priceof $1.22 per share. This offering was conducted as a private placement pursuantto the exemption from registration provided by Section 4(2) of the SecuritiesAct of 1933, as amended, and the rules and regulations promulgated thereunder.With respect to the transaction with Laurus, the Company has entered into anagreement to register the common stock underlying the warrants and the commonstock that may be received upon any conversion of the secured term note.  On October 5, 2005 proceeds from the SigmaTeltransaction were used to repay the approximately $2.1 million owed to LaurusMaster Fund, Ltd. as well as payment of certain expenses related to thetransaction.

 

**ITEM3 —DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM5 — OTHER INFORMATION**

 

None.

 

**ITEM 6 —EXHIBITS**

 

(a)    Exhibits:

 

See Exhibit Index

 

 

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**SIGNATURES**

 

In accordance with the requirements of the SecuritiesExchange Act of 1934, as amended, the Registrant has caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| ** **              | **APOGEE TECHNOLOGY, INC.**                                     |
|-------------------------|-----------------------------------------------------------------|
|                    |                                                            |
| Date: November 14, 2005 | By: /s/ Herbert M. Stein                                        |
|                    | Title: Chairman of the Board,                                   |
|                    | President, Chief Executive Officer                              |
|                    | (principal executive officer)                                   |
|                    |                                                            |
| ** **              | **APOGEE TECHNOLOGY, INC.**                                     |
|                    |                                                            |
| Date: November 14, 2005 | By: /s/ Paul J. Murphy                                          |
|                    | Name: Paul J. Murphy                                            |
|                    | Title: Chief Financial officer and Vice President of  Finance   |
|                    | (principal financial officer and principal  accounting officer) |
|                    |                                                            |

 

 

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**FORM-10-QSB**

**SEPTEMBER 30, 2005**

 

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                 |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                            |
| 10.1*       |       | Securities Purchase  Agreement, by and between Apogee Technology, Inc. and Laurus Master  Fund, Ltd., incorporated herein by reference from Exhibit 10.1 to the  Registrant’s Form 8K as filed on August 9, 2005 (File No. 001-10456).                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2        |       | Master Security  Agreement, by and between Apogee Technology, Inc. and Laurus Master  Fund, Ltd., incorporated herein by reference from Exhibit 10.2 to the  Registrant’s Form 8K as filed on August 9, 2005 (File No. 001-10456).                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3        |       | Form of Laurus  Master Fund, Ltd. Warrant, incorporated herein by reference from Exhibit 10.3  to the Registrant’s Form 8K as filed on August 9, 2005 (File No.  001-10456).                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4        |       | Grant of Security  Interest In Patents and Trademarks, by and between Apogee  Technology, Inc. and Laurus Master Fund, Ltd., incorporated herein by  reference from Exhibit 10.4 to the Registrant’s Form 8K as filed on  August 9, 2005 (File No. 001-10456).                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5        |       | Registration Rights Agreement,  by and between Apogee Technology, Inc. and Laurus Master Fund, Ltd.,  incorporated herein by reference from Exhibit 10.5 to the Registrant’s Form  8K as filed on August 9, 2005 (File No. 001-10456).                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6        |       | Form of Biscayne  Capital Markets, Inc. Warrant, incorporated herein by reference from  Exhibit 10.7 to the Registrant’s Form 8K as filed on August 9, 2005  (File No. 001-10456).                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7        |       | Secured Convertible  Term Note, by and between Apogee Technology, Inc. and Laurus Master  Fund, Ltd., incorporated herein by reference from Exhibit 10.7 to the  Registrant’s Form 8K as filed on August 9, 2005 (File No. 001-10456).                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8        |       | Asset Purchase  Agreement dated as of October 5, 2005, by and among SigmaTel, Inc.,  Apogee Technology, Inc., certain stockholders, and with respect to the  provisions of Section 8.15 only, David B. Meyers, incorporated herein by  reference from Exhibit 99.1 to the Registrant’s Form 8K as filed on October  7, 2005 (File No. 001-10456). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.9        |       | Escrow Agreement dated  as of October 5, 2005, among SigmaTel, Inc., Apogee  Technology, Inc., and Wells Fargo Bank, N.A., incorporated herein by  reference from Exhibit 99.2 to the Registrant’s Form 8K as filed on October  7, 2005 (File No. 001-10456).                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10       |       | Indemnification  Agreement dated as of October 5, 2005, among SigmaTel, Inc., Apogee  Technology, Inc., Herbert M. Stein, H.M. Stein Associates, and Sheryl B.  Stein. incorporated herein by reference from Exhibit 99.3 to the Registrant’s  Form 8K as filed on October 7, 2005 (File No. 001-10456).                                               |
| .           |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1        |       | Statement Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer  Regarding Facts and Circumstances Relating to Exchange Act Filings.                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2        |       | Statement Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief 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.                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |

 

Where a document is incorporated by reference from a previous filing, the exhibit number of the document in that previous filing is indicated in parentheses after the description of such document.

 

Certain confidential material contained in thisdocument has been omitted and filed separately with the Securities and ExchangeCommission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, asamended.

 

 

 

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