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

**Washington, D.C. 20549**

 

**FORM 10-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, 2003**                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **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**                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **APOGEE TECHNOLOGY, INC.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (Exact  name of registrant as specified in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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

** **

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

 

Statethe number of shares of each of the Issuer’s classes of common equity, as ofthe latest practicable date:  As ofOctober 7, 2003, there were 5,638,610 shares of Common Stock, $.01 parvalue per share, outstanding on a pre-split basis.

 

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

 

 

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**APOGEE TECHNOLOGY, INC.**

 

**INDEX OF INFORMATIONCONTAINED IN FORM 10-QSB FOR THEQUARTER ENDED SEPTEMBER 30, 2003**

 
| **PART I-FINANCIAL INFORMATION**                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                |
| Item 1 - Financial  Statements (Unaudited)                                                                                                                          |
| Condensed  Consolidated Balance Sheets at September 30, 2003 and December 31,  2002.                                                                      |
| Condensed Consolidated  Statements of Operations and Accumulated  Deficit for the Three and Nine Months Ended September 30, 2003 and  September 30, 2002. |
| Condensed Consolidated  Statements of Cash Flows for the Nine Months  Ended September 30, 2003 and September 30, 2002.                                    |
| Notes to Condensed  Consolidated Financial Statements.                                                                                                              |
|                                                                                                                                                                |
| Item 2 - Management’s Discussion  and Analysis of Financial Condition and Results of Operation                                                                 |
|                                                                                                                                                                |
| Item 3  - Quantitative and Qualitative Disclosures about Market Risk                                                                                                |
|                                                                                                                                                                |
| Item 4 - Controls and Procedures                                                                                                                                    |
|                                                                                                                                                                |
| **PART II - OTHER INFORMATION**                                                                                                                                     |
|                                                                                                                                                                |
| Item  1 - Legal Proceedings                                                                                                                                         |
|                                                                                                                                                                |
| Item 2 - Changes in Securities and Use  of Proceeds                                                                                                                 |
|                                                                                                                                                                |
| Item 3 - Defaults Upon Senior  Securities                                                                                                                           |
|                                                                                                                                                                |
| Item 4 - Submission of Matters to a  Vote of Security Holders                                                                                                       |
|                                                                                                                                                                |
| Item 5 - Other Information                                                                                                                                          |
|                                                                                                                                                                |
| Item 6 - Exhibits and Reports on  Form 8-K                                                                                                                     |
|                                                                                                                                                                |
| Signatures                                                                                                                                                          |

 

2

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
|                                                                                                          |   | **SEPTEMBER 30,  2003** |          | **DECEMBER 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------------|-----------------------------|--------|
|                                                                                                          |   | **(Unaudited)**              |          |                        |   |
| **ASSETS**                                                                                                    |   |                         |          |                        |   |
|                                                                                                          |   |                         |          |                        |   |
| **Current assets**                                                                                            |   |                         |          |                        |   |
| Cash  and cash equivalents                                                                                    |   | **$**                        | **987,812**   |                        | $      | 994,296 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $40,000 in 2003 and  $25,000 in 2002          |   | **4,008,450**                |          | 2,030,492                   |   |
| Inventories                                                                                                   |   | **974,011**                  |          | 138,702                     |   |
| Prepaid  expenses and other current assets                                                                    |   | **196,634**                  |          | 102,772                     |   |
| Total  current assets                                                                                         |   | **6,166,907**                |          | 3,266,262                   |   |
| **Property and equipment, net of accumulated depreciation of  $363,765 in 2003 and $307,381 in 2002**         |   | **126,172**                  |          | 139,332                     |   |
| **Other assets**                                                                                              |   |                         |          |                        |   |
| Digital  amplifier patents, net of accumulated amortization of $99,303 in 2003 and  $84,005 in 2002           |   | **88,167**                   |          | 93,256                      |   |
|                                                                                                          |   | **$**                        | **6,381,246** |                        | $      | 3,498,850 |   |
|                                                                                                          |   |                         |          |                        |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                 |   |                         |          |                        |   |
|                                                                                                          |   |                         |          |                        |   |
| **Current liabilities**                                                                                       |   |                         |          |                        |   |
| Bank  line of credit                                                                                          |   | **$**                        | **400,000**   |                        | $      | — |   |
| Accounts  payable and accrued expenses                                                                        |   | **1,617,613**                |          | 999,919                     |   |
| Current  maturities of capital lease obligations                                                              |   | **4,920**                    |          | 16,514                      |   |
| Total  current liabilities                                                                                    |   | **2,022,533**                |          | 1,016,433                   |   |
| **Capitalized lease obligations - net of current maturities**                                                 |   | **—**                   |          | 3,462                       |   |
| Total  liabilities                                                                                            |   | **2,022,533**                |          | 1,019,895                   |   |
| **Stockholders’ equity**                                                                                 |   |                         |          |                        |   |
| Common  stock, $.01 par value;                                                                                |   |                         |          |                        |   |
| 20,000,000  shares authorized, 5,577,785 and 5,370,585 issued and outstanding in 2003 and  2002, respectively |   | **55,778**                   |          | 53,706                      |   |
| Additional  paid-in capital                                                                                   |   | **15,050,293**               |          | 13,599,926                  |   |
| Accumulated  deficit                                                                                          |   | **(10,747,358**              | **)**         | (11,174,677                 | )      |
| Total  stockholders’ equity                                                                              |   | **4,358,713**                |          | 2,478,955                   |   |
|                                                                                                          |   | **$**                        | **6,381,246** |                        | $      | 3,498,850 |   |

 

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

 

3

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**APOGEE TECHNOLOGY,INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATEDDEFICIT

 
|                                                                |   | **THREE MONTHS ENDED  SEPTEMBER 30,** |            | **NINE MONTHS ENDED  SEPTEMBER 30,** |       |
|---------------------------------------------------------------------|--------|--------------------------------------------|-----------------|-------------------------------------------|------------|
|                                                                |   | **2003**                                   |            | **2002**                                  |       | **2003** |   | **2002** |   |
| **Revenues**                                                        |   |                                       |            |                                      |       |   |   |   |   |
| Product  sales                                                      |   | **$**                                      | **2,626,292**   |                                      | $          | 1,024,639 | ** ** | **$** | **6,831,177** |   | $ | 2,370,140 |   |
| Royalties                                                           |   | **488,739**                                |            | 492,576                                   | ** ** | **1,156,073** |   | 893,510 |   |
| Consulting                                                          |   | **—**                                 |            | 113,000                                   | ** ** | **—** |   | 152,871 |   |
|                                                                |   | **3,115,031**                              |            | 1,630,215                                 | ** ** | **7,987,250** |   | 3,416,521 |   |
| **Costs and expenses**                                              |   |                                       |            |                                      |       |   |   |   |   |
| Product  sales                                                      |   | **1,858,317**                              |            | 720,310                                   | ** ** | **4,791,244** |   | 1,638,553 |   |
| Research  and development                                           |   | **433,941**                                |            | 483,165                                   | ** ** | **1,163,682** | ** ** | 1,282,004 |   |
| Selling,  general and administrative                                |   | **494,113**                                |            | 412,098                                   | ** ** | **1,604,473** | ** ** | 1,474,543 |   |
|                                                                |   | **2,786,371**                              |            | 1,615,573                                 | ** ** | **7,559,399** | ** ** | 4,395,100 |   |
| **Income (loss) before other income (expense)**                     |   | **328,660**                                | ** **      | 14,642                                    |       | **427,851** | ** ** | (978,579 | ) |
|                                                                |   |                                       |            |                                      |       |   |   |   |   |
| **Other income (expense)**                                          |   |                                       | ** **      |                                      |       |   | ** ** |   |   |
| Interest  expense                                                   |   | **(7,060**                                 | **)**           | (1,131                                    | )          | **(8,909** | **)** | (4,846 | ) |
| Interest  income                                                    |   | **3,524**                                  | ** **      | 5,634                                     |       | **8,377** | ** ** | 23,641 |   |
|                                                                |   |                                       |            |                                      |       |   |   |   |   |
|                                                                |   | **(3,536**                                 | **)**           | 4,503                                     |       | **(532** | **)** | 18,795 |   |
|                                                                |   |                                       |            |                                      |       |   |   |   |   |
| **Net income (loss)**                                               |   | **325,124**                                | ** **      | 19,145                                    |       | **427,319** | ** ** | (959,784 | ) |
|                                                                |   |                                       |            |                                      |       |   |   |   |   |
| Accumulated  deficit - beginning                                    |   | **(11,072,482**                            | **)**           | (11,088,267                               | )          | **(11,174,677** | **)** | (10,109,338 | ) |
|                                                                |   |                                       |            |                                      |       |   |   |   |   |
| **Accumulated deficit - ending**                                    |   | **$**                                      | **(10,747,358** | **)**                                     | $          | (11,069,122 | ) | **$** | **(10,747,358** | **)** | $ | (11,069,122 | ) |
|                                                                |   |                                       |            |                                      |       |   |   |   |   |   |   |   |   |
| **Basic and diluted income (loss) per common share**                |   | **$**                                      | **0.06**        |                                      | $          | 0.00 | ** ** | **$** | **0.08** |   | $ | (0.18 | ) |
|                                                                |   |                                       |            |                                      |       |   |   |   |   |   |   |   |   |
| **Weighted average common shares outstanding - basic and  diluted** |   | **5,457,434**                              |            | 5,234,751                                 | ** ** | **5,406,816** |   | 5,233,310 |   |

 

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

 

4

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                                    |   | **NINE MONTHS ENDED  SEPTEMBER 30,** |        |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------|-------------|
|                                                                                    |   | **2003**                                  |        | **2002** |   |
| **Cash flows from operations**                                                          |   |                                      |        |   |   |
| Net  income (loss)                                                                      |   | **$**                                     | **427,319** |   | $ | (959,784 | ) |
| *Adjustments to reconcile net income (loss) to net cash  used in operating activities:* |   |                                      | ** **  |   |   |
| Provision  for doubtful accounts                                                        |   | **15,000**                                | ** **  | 15,000 |   |
| Depreciation  and amortization                                                          |   | **71,682**                                | ** **  | 74,274 |   |
| *Changes in operating assets and liabilities:*                                          |   |                                      | ** **  |   |   |
| Accounts  receivable                                                                    |   | **(1,992,958**                            | **)**       | (1,518,089 | ) |
| Inventories                                                                             |   | **(835,309**                              | **)**       | 268,219 |   |
| Prepaid  expenses and other current assets                                              |   | **(94,262**                               | **)**       | 12,840 |   |
| Accounts  payable and accrued expenses                                                  |   | **617,694**                               | ** **  | 417,744 |   |
|                                                                                    |   |                                      |        |   |   |
| Net  cash used in operating activities                                                  |   | **(1,790,834**                            | **)**       | (1,689,796 | ) |
|                                                                                    |   |                                      |        |   |   |
| **Cash flows from investing activities**                                                |   |                                      | ** **  |   |   |
| Purchases  of property and equipment                                                    |   | **(43,224**                               | **)**       | (18,622 | ) |
| Patent  costs                                                                           |   | **(9,809**                                | **)**       | (42,027 | ) |
|                                                                                    |   |                                      |        |   |   |
| Net  cash used in investing activities                                                  |   | **(53,033**                               | **)**       | (60,649 | ) |
|                                                                                    |   |                                      |        |   |   |
| **Cash flows from financing activities**                                                |   |                                      | ** **  |   |   |
| Proceeds  from issuances of common stock                                                |   | **1,452,439**                             | ** **  | 32,852 |   |
| Redemption  of common stock                                                             |   | **—**                                | ** **  | (5,500 | ) |
| Proceeds  from bank line of credit                                                      |   | **400,000**                               | ** **  | — |   |
| Repayment  of capital lease obligations                                                 |   | **(15,056**                               | **)**       | (27,511 | ) |
|                                                                                    |   |                                      |        |   |   |
| Net  cash provided by (used in) financing activities                                    |   | **1,837,383**                             | ** **  | (159 | ) |
|                                                                                    |   |                                      |        |   |   |
| **Decrease in cash and cash equivalents**                                               |   | **(6,484**                                | **)**       | (1,750,604 | ) |
|                                                                                    |   |                                      |        |   |   |
| Cash  and cash equivalents - beginning                                                  |   | **994,296**                               | ** **  | 2,387,178 |   |
|                                                                                    |   |                                      |        |   |   |
| **Cash and cash equivalents - ending**                                                  |   | **$**                                     | **987,812** | ** ** | $ | 636,574 |   |

 

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

 

5

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002

 

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

 

The condensed consolidated interim financialstatements have been prepared in accordance with the requirements of RegulationS-B and with the instructions to Form 10-QSB.  Accordingly, certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted.  In the opinion of management, alladjustments (consisting only of normal recurring accruals) necessary to presentfairly the financial position, results of operations and cash flows have beenincluded.  The results of operations forthe nine month period ended September 30,2003 are not necessarily indicative of the operating results to beexpected for the year ending December 31, 2003.  These financial statements should be read in conjunction with thefinancial statements and accompanying notes for the year endedDecember 31, 2002.

 

The balance sheet at December 31, 2002 has beenderived from the audited financial statements at that date but does not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements.

 

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

 

The Company is engaged in the development, designand marketing of digital amplifier technology and related sales ofsemi-conductor chips.  The Company ispresently focused on computer based audio and entertainment media applicationsderived from its all-digital amplifier design trademarked as Direct DigitalAmplification (DDX®).

 

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

 

The Company has adopted only the disclosureprovisions of Financial Accounting Standard No. 123, “Accounting For Stock-BasedCompensation” (FAS 123).  It applies APBOpinion No. 25, “Accounting For Stock Issued To Employees”, and relatedinterpretations in accounting for its plan and does not recognize compensationexpense for its stock-based compensation plan other than for certain optionsgranted in 2001.

 

The following tables illustrates the effecton net income/(loss) and income/(loss) per share if the Company had applied thefair value recognition provisions of FAS 123 to stock-based employeecompensation.  The income (loss) pershare information shown below has not been adjusted for the stock splitreferred to in note 5.

 
|                                                                                                                                                       |   | **Nine Months Ended  September 30,** |         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------------|
|                                                                                                                                                       |   | **2003**                                  |         | **2002** |   |
| Net income (loss), as  reported                                                                                                                            |   | **$**                                     | **427,319**  |   | $ | (959,784 | ) |
|                                                                                                                                                       |   |                                      |         |   |   |
| Deduct:      Total stock-based employee compensation expense determined under fair  value based method for all awards  ***** |   | **(1,342,385**                            | **)**        | (920,614 | ) |
|                                                                                                                                                       |   |                                      | ** **   |   |   |
| Pro-forma net loss  ******                                                                                                                            |   | **$**                                     | **(915,066** | **)** | $ | (1,880,398 | ) |

 

6

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|                            |   | **Nine Months Ended  September 30,** |      |
|---------------------------------|--------|-------------------------------------------|-----------|
|                            |   | **2003**                                  |      | **2002** |   |
|                            |   |                                      |      |   |   |
| Income (loss) per share:        |   |                                      |      |   |   |
|                            |   |                                      |      |   |   |
| As reported, basic and  diluted |   | **$**                                     | **0.08**  |   | $ | (0.18 | ) |
|                            |   |                                      |      |   |   |
| Pro-forma, basic and  diluted   |   | **$**                                     | **(0.17** | **)** | $ | (0.36 | ) |

 
|                                                                                                                                                   |   | **Three Months Ended  September 30,** |         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------------|
|                                                                                                                                                   |   | **2003**                                   |         | **2002** |   |
|                                                                                                                                                   |   |                                       |         |   |   |
| Net income, as reported                                                                                                                                |   | **$**                                      | **325,124**  |   | $ | 19,145 |   |
|                                                                                                                                                   |   |                                       |         |   |   |
| Deduct:      Total stock-based employee compensation expense determined under fair  value based method for all awards  * |   | **(476,480**                               | **)**        | (344,270 | ) |
|                                                                                                                                                   |   |                                       | ** **   |   |   |
| Pro-forma net loss  ******                                                                                                                        |   | **$**                                      | **(151,356** | **)** | $ | (325,125 | ) |
|                                                                                                                                                   |   |                                       |         |   |   |
| Income (loss) per share:                                                                                                                               |   |                                       |         |   |   |
|                                                                                                                                                   |   |                                       |         |   |   |
| As reported, basic and  diluted                                                                                                                        |   | **$**                                      | **0.06**     |   | $ | 0.00 |   |
|                                                                                                                                                   |   |                                       |         |   |   |
| Pro-forma, basic and  diluted                                                                                                                          |   | **$**                                      | **(0.03**    | **)** | $ | (0.06 | ) |

 

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*****                 All awards refer to awards granted, modified,or settled in fiscal periods beginning after December 15, 1994 - awardsfor which the fair value was required to be measured under FAS 123.

 

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

 

7

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**3.****                                      Inventories**

 

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

 
|           |   | **September 30,  2003** |        | **December 31,  2002** |   |
|----------------|--------|------------------------------|-------------|-----------------------------|--------|
|           |   | **(Unaudited)**              |        |                        |   |
|           |   |                         |        |                        |   |
| Raw materials  |   | **$**                        | **25,018**  |                        | $      | 33,441 |   |
| Finished goods |   | **948,993**                  |        | 105,261                     |   |
|           |   |                         |        |                        |   |
|           |   | **$**                        | **974,011** |                        | $      | 138,702 |   |

 

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

 

On October 30, 2002, the Company obtained a $1million discretionary bank line-of-credit, which expired on August 31,2003.  During the current quarter theexpiration date (for advances under the line) was extended to November 30,2003.  Any borrowings under the line aredue at the earlier of demand or December 1, 2003. Borrowings are limitedto the lesser of $1 million or the sum of 75% of eligible domestic accountsreceivable and 80% of eligible foreign accounts receivable.  The bank, at its discretion, may makeadditional advances up to $500,000, exclusive of the formula, but may notexceed $1 million.  The line is securedby the Company’s assets and has been personally guaranteed by two of theCompany’s officers/directors.  Interestis payable monthly at the bank’s base rate plus one percent per annum.  At September 30, 2003, borrowingsoutstanding under this line amounted to $400,000.  In November 2003 the Company repaid the $400,000 under thisline.

 

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

 

***PrivatePlacements (pre stock split)***

 

In July 2003, the Company completed a private placementfor 50,000 shares of common stock at $6.00 per share. Proceeds received were$300,000. Additionally, in May 2003 the Board of Directors approved a newprivate placement of 500,000 shares at $10.00 per share. InSeptember 2003, pursuant to this private placement, the Company issued100,000 shares of common stock for total proceeds of $1,000,000.

** **

***Stock Options(pre stock split)***

 

During the three months ended September 30, 2003 the Board ofDirectors awarded options to purchase 17,500 shares at exercise prices rangingfrom $11.20 to $15.90, to certain employees. These options were granted under the 1997 Employee, Director and ConsultantStock Option Plan.  The options vestover five years beginning at the first anniversary of the date of grant.

 

8

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***Other Stock Issuances (pre stock split)***

** **

During the third quarter of 2003, 4,700 sharesof common stock were issued as a result of exercised stock options at exerciseprices ranging from $1.25 to $11.05 per share. The Company also issued 30,000shares of common stock as a result of exercised warrants during the quarter.The exercise price was $2.50 per share.

 

***Stock******Split***

 

On August 12, 2003, the Board ofDirectors authorized a 2-for-1 stock split, in the form of a stock dividend, tostockholders of record on November 17, 2003.  Share and per-share amounts in the accompanying financial statementsare presented on a pre-split basis.

 

**6.****                                      LicenseAgreement**

 

 OnFebruary 7, 2001, the Company signed an exclusive license agreement withST Microelectronics NV (“ST”) of the Netherlands.  The agreement calls for ST to use certain intellectual propertyrights owned or controlled by the Company to commercialize and sell relatedproducts utilizing such technology.  Inconsideration for this license, ST paid to the Company a one-time license feeof $1.6 million in cash and a $400,000 credit for future design services.  The Company will also receive royaltiesbased on certain formulas, as defined in the agreement.  This agreement has no expiration date,however, either party may cancel the agreement upon certain advance notices asdefined in the agreement.  The $400,000credit portion of the license fee is associated with future developmentactivities of the Company and will not be recognized in income before thathappens.  When the $400,000 amount isrecognized in income, it will simultaneously be charged to research anddevelopment costs.

 

In prior years the Company recognized $220,000 ofthe credit for future design services. During the quarter and nine months ended September 30, 2003 the Company did not recognize any suchincome.

 

**7.****                                      Concentrations**

 

During the quarter and nine months endedSeptember 30, 2003, approximately 95% and 71% of the Company’s productsales were derived from six and three customers, respectively.

 

Three of the Company’s customers accounted for approximately 69% ofthe total accounts receivable balance at September 30, 2003.

 

Approximately 99% of the Company’s product sales forthe quarter and nine months ended September 30, 2003 were to customers inAsia.

 

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

** **

One vendor accounted for approximately 99% of the Company’s purchasesfor the quarter ended September 30,2003.

 

9

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**ITEM 2.  MANAGEMENT****’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**GENERAL**

** **

The following Management’sDiscussion and Analysis of the Company’s Financial Condition and Results ofOperations for the three- and nine-month periods ended September 30, 2003and September 30, 2002 should be read in conjunction with the Company’sFinancial Statements and related Notes included elsewhere in this QuarterlyReport on Form 10-QSB. This discussion contains, in addition to historicalstatements, forward-looking statements that involve risks and uncertainties.The Company’s actual results could differ significantly from the resultsdiscussed in the forward-looking statements. Factors that could cause orcontribute to such differences include the factors discussed in thesection titled “Certain Risk Factors That May Affect Future Resultsof Operations And Our Common Stock Price” as well as other factors described inthe Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 2002. The Company does not intend to update any suchforward-looking statements.

 

**INTRODUCTION**

** **

The Companydesigns, develops and markets semiconductor products or integrated circuits(ICs) incorporating the Company’s patented Direct Digital Amplification (DDX®)technology. DDX-based IC products are used in a range of audio applicationsincluding:  home theater systems,powered speakers, car audio, commercial audio, and PC multi-media. Under a licensingagreement with STMicroelectronics NV (ST), the Company is developing andproviding intellectual property to be used in royalty bearing products producedby ST.  In addition, the Company isworking under a development agreement with ST to develop and market newsemiconductor products that leverage Apogee’s DDX technology and ST’sintellectual property and semiconductor design, development and manufacturingcapability**.**In 2003 the Companyinitiated the commercialization of a proprietary power supply technology whichit expects to license and market as an integrated module. The Company marketsits products using a worldwide network of direct sales staff, independent salesrepresentatives and distributors. The Company generates revenue from the sale of DDX-based semiconductorchips and related products as well as royalties earned under the licensingagreement with ST signed in February 2001. The Company recorded a netprofit of approximately $325,100 and $427,300 for the three and nine monthsended September 30, 2003, as compared to a net profit of approximately$19,000 for the three months ended September 30, 2002 and a net loss ofapproximately $960,000 for the nine months ended September 30, 2002. Thenet profit for the three and nine months ended September 30, 2003 was theresult of revenue from the sales of the Company’s semi-conductor products aswell as royalties earned under the ST licensing agreement.  As of September 30, 2003, the Companyhad an accumulated deficit of approximately $10.7 million, as compared to adeficit of approximately $11.2 million at December 31, 2002. Of thisaccumulated deficit, approximately $4 million was attributable to the Company’snow defunct loudspeaker business, which was discontinued in 1994. The Company’snet losses and accumulated deficit (since 1995) result primarily from researchcosts associated with the Company’s efforts to develop and market its DDXtechnology.  As of September 30,2003, the Company had 29 employees, up from 25 as of September 30, 2002.

 

During the three-monthperiod ended September 30, 2003, six customers represented, in theaggregate, approximately 95% of product revenue.  The Company utilizes a network of sales representatives anddistributors, as well as a sales office in Hong Kong, to support the Company’sworldwide sales and marketing activities.

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

Thefollowing selected financial data for the three- and nine-month periods endedSeptember 30, 2003 and September 30, 2002 have been derived from theCompany’s financial statements.  Anytrends reflected by the following table may not be indicative of futureresults.

 
|                                                       |   | **For the Three-Month Period  Ended  September 30,** |      | **For the Nine-Month Period  Ended  September 30,** |   |
|------------------------------------------------------------|--------|-----------------------------------------------------------|-----------|----------------------------------------------------------|--------|
|                                                       |   | **2003**                                                  |      | **2002**                                                 |   | **2003** |   | **2002** |   |
| Statement of Operation Data:                               |   |                                                      |      |                                                     |   |   |   |   |   |
| Revenue                                                    |   | $                                                         | 3,115,031 |                                                     | $      | 1,630,215 |   | $ | 7,987,250 |   | $ | 3,416,521 |   |
| Costs and expenses                                         |   | 2,786,371                                                 |      | 1,615,573                                                |   | 7,559,399 |   | 4,395,100 |   |
| Other Income (expenses)                                    |   | (3,536                                                    | )         | 4,503                                                    |   | (532 | ) | 18,795 |   |
| Net Profit (Loss)                                          |   | $                                                         | 325,124   |                                                     | $      | 19,145 |   | $ | 427,319 |   | $ | (959,784 | ) |
|                                                       |   |                                                      |      |                                                     |   |   |   |   |   |
| Shares Outstanding *(Pre Split)*                           |   | 5,577,785                                                 |      | 5,232,251                                                |   | 5,577,785 |   | 5,232,251 |   |
|                                                       |   |                                                      |      |                                                     |   |   |   |   |   |
| Balance Sheet Data:                                        |   |                                                      |      |                                                     |   |   |   |   |   |
| Total Assets                                               |   | $                                                         | 6,381,246 |                                                     | $      | 2,782,552 |   | $ | 6,381,246 |   | $ | 2,782,552 |   |
| Stockholders’ equity                                  |   | $                                                         | 4,358,713 |                                                     | $      | 1,809,506 |   | $ | 4,358,713 |   | $ | 1,809,506 |   |
| Profit (Loss) per share (basic and diluted)  *(Pre-split)* |   | $                                                         | 0.06      |                                                     | $      | 0.00 |   | $ | 0.08 |   | $ | (0.18 | ) |

 

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**RESULTS OFCONTINUING OPERATIONS OF THE COMPANY**

 

The following table sets forth,for the periods indicated, the percentage of total revenue represented bycertain revenue and expense items.  Thetable and the discussion below should be read in conjunction with the condensedconsolidated financial statements and notes thereto that appear elsewhere inthis report.

 
|                               |   | **For  the Three Months Ended  September 30,** |       | **For  the Nine Months Ended**September 30, |       |
|------------------------------------|--------|-----------------------------------------------------|------------|--------------------------------------------------|------------|
|                               |   | **2003**                                            |       | **2002**                                         |       | **2003** |   | **2002** |   |
|                               |   |                                                | ** ** |                                             | ** ** |   | ** ** |   | ** ** |
| Product Sales                      |   | 84.31                                               | %          | 62.85                                            | %          | 85.53 | % | 69.38 | % |
| Royalties                          |   | 15.69                                               |       | 30.22                                            |       | 14.47 |   | 26.15 |   |
| Consulting                         |   | 0.00                                                |       | 6.93                                             |       | 0.00 |   | 4.47 |   |
|                               |   |                                                |       |                                             |       |   |   |   |   |
| Cost of Sales                      |   | 59.66                                               |       | 44.18                                            |       | 59.99 |   | 47.96 |   |
| Research and Development           |   | 13.93                                               |       | 29.64                                            |       | 14.57 |   | 37.52 |   |
| Sales, General and  Administrative |   | 15.86                                               |       | 25.28                                            |       | 20.09 |   | 43.16 |   |
|                               |   |                                                |       |                                             |       |   |   |   |   |
| Operating Profit (Loss)            |   | 10.55                                               | %          | 0.90                                             | %          | 5.35 | % | (28.64 | )% |
|                               |   |                                                |       |                                             |       |   |   |   |   |
| Other Income (Expense)             |   | (0.11                                               | )          | 0.27                                             |       | (0.01 | ) | 0.55 |   |
| Net Profit (Loss)                  |   | 10.44                                               | %          | 1.17                                             | %          | 5.34 | % | (28.09 | )% |

** **

Revenue

 

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

** **

Totalrevenue increased by approximately 93.8% or $1.5 million to $3.1 million forthe three months ended September 30, 2003 from $1.6 million for the threemonths ended September 30, 2002. Total revenue increased approximately 135.3% or $4.6 million for thenine months ended September 30, 2003 to approximately $8.0 million up from$3.4 million for the same period in 2002.

 

Revenuefrom the sale of the Company’s products, consisting of semiconductor IC’s, aswell as, DDX evaluation and reference boards, increased by approximately 160%or $16 million to $2.6 million for the three months ended September 30,2003 from $1.0 million for the three months ended September 30, 2002 andby approximately 183.3% or $4.4 million to $6.8 million for the nine monthsended September 30, 2003 as compared to $2.4 million for the same periodin 2002. This increase in product revenue was primarily due to growth in thesale of the Company’s semiconductor products.

 

Revenuefrom non-product related items accounted for approximately 16% and 14% of totalrevenue for the three and nine months ended September 30, 2003,respectively, compared to revenue from non-product related items ofapproximately 37% and 31% of total revenue for the same periods in 2002.  During the three months and nine monthsended September 30, 2003, the Company recorded net royalty payments underthe ST agreement of approximately $488,700 and $1,156,100, compared to royaltypayments of $492,600 and $893,500 for the same periods in 2002.  For the nine months ended September 30,2003 royalties increased by approximately $262,600 or 29.4%, although suchroyalties declined slightly from the third quarter ended September 30,2002 by $3,900 or less than 1% to $488,700 for the three months endedSeptember 30, 2003 from $492,600 for the same period in 2002.

 

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Total Revenue for the Three and Nine Months Ended September 30,2003 and 2002 consisted of:

 
|           |   | **For the Three-Month Period  Ended  September 30,** |    | **For the Nine-Month Period  Ended  September 30,** |       |
|----------------|--------|-----------------------------------------------------------|---------|----------------------------------------------------------|------------|
|           |   | **2003**                                                  |    | **2002**                                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Product  Sales |   |                                                      | $       | 2,626,292                                                |       | $ | 1,024,639 |   | $ | 6,831,177 |   | $ | 2,370,140 |   |
| Royalties      |   |                                                      | 488,739 |                                                     | 492,576    |   | 1,156,073 |   | 893,510 |   |
| Consulting     |   |                                                      | —  |                                                     | 113,000    |   | — |   | 152,871 |   |
|           |   |                                                      |    |                                                     |       |   |   |   |   |   |
| Total:         |   |                                                      | $       | 3,115,031                                                |       | $ | 1,630,215 |   | $ | 7,987,250 |   | $ | 3,416,521 |   |

 

Costof Revenue

 

**Cost of revenue was approximately $1.9million and $4.8 million for the three and nine months ended September 30,2003, respectively, compared to approximately $720,300 and $1.6 million for thesame periods in 2002. Cost of revenue includes cost of purchasing finishedsemiconductor chips as well as customs and storage fees.  This increase in the cost of revenue isprimarily attributable to costs relating to increased sales of the Company’s semiconductorproducts, as well as the establishment of a warehousing facility in Asia.  For the three and nine months endedSeptember 30, 2003, the Company recorded a gross margin from product salesof approximately 29% and 30%, respectively, compared to a gross margin fromproduct sales of 30% and 31%, respectively, for the same periods in 2002.  The Company anticipates that the cost ofproduct sales will continue to increase in dollar amounts as the Company continuesincreasing its product sales, but to decline as a percentage of revenue.**

** **

Research and Development(“R&D”) Expenses

 

Research anddevelopment expenses consist primarily of salaries and related expenses in thedesign, development and technical support of the Company’s products as well asdirect support to current and potential customers in the development ofconsumer products utilizing DDX semiconductor products.  Research and development expensesdecreased to approximately $433,900 and $1,163,700 for the three months andnine months ended September 30, 2003, compared to approximately $483,200and $1,282,000 for the same periods in 2002. This decrease of approximately $49,300 or 10.2% and $118,300 or 9.2%,respectively, was related to the reduction in use of third partyconsultants.  Costs related to humanresources for R & D increased to approximately $379,400 and $1,054,600 forthe three and nine months ended September 30, 2003 from $337,400 and$955,900 for the three months and nine months ended September 30, 2002, anincrease of approximately $42,000 or 12.4% and $98,700 or 10.3%,respectively.  The Company continues toinvest in the development of its next generation IC’s, as well as, thecontinuation of support to both existing and potential customers.  Due to the technical nature of the Company’sproducts, engineering and design support are critical parts of the Company’sstrategy during both the development of its products and the support to itscustomers from product design to final production.  Management anticipates that it will continue to commit resourcesto research, development and design activities.  It expects these expenses to increase, but to decline as apercentage of revenue as revenue increases.

 

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

 

Sellingexpenses consist primarily of salaries and related expenses for personnelengaged in the marketing and sales of the Company’s products, as well as costsrelated to trade shows, product literature, travel and other promotionalsupport costs. In addition, selling expenses include costs of its Hong Kongsales office, opened in April 2002. General and administrative costs consist primarily of executive andadministrative salaries, professional fees and other associated corporate expenses.The change in SG & A, described below, was attributable principally tosupport for the Company’s Hong Kong Office, increased human resource costs andcommissions paid to distributors and representatives on increased productrevenue, offset by a decrease in professional fees, travel expenses and generaladministrative costs.  SG&A expenseswere approximately $494,100 and $1,604,500 for the three months and nine monthsended September 30, 2003, compared to approximately $412,100 and$1,474,500 for the same periods in 2002, an increase of approximately $82,000or 19.9% and $130,000 or 8.8%, respectively. Human resource costs increased approximately $75,000 and $184,500 toapproximately $239,000 and $735,300 during the three months and nine monthsended September 30, 2003 compared to $164,000 and $550,800 during the sameperiod in 2002, an increase of 45.7% and 33.5%, respectively.  This increase was primarily due to highercompensation, as well as, an increase in staffing at the Hong Kong office.  At September 30, 2003 the Hong Kongoffice employed five individuals, up from four employees at September 30,2002.  Approximately $63,100 and$181,100 of the human resource expense for the three and nine months endedSeptember 30, 2003 was related to staffing the Hong Kong Office.  This compared to approximately $42,300 and$72,600 for the same periods in 2002. Commissions and distribution expense on product sales increasedapproximately $19,100 or 100.5% and $60,600 or 72.3% to $38,100 and $144,400for the three and nine months ended September 30, 2003, compared to$19,000 and $83,800 for the same periods in 2002.  As the Company expands its sales presence

 

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 with additional sales representativesworldwide, this number is expected to continue to increase.  Travel expense increased approximately 17.9%or $8,300 to approximately $55,100 for the three months endedSeptember 30, 2003 compared to $46,800 for the three months endedSeptember 30, 2002.  For the ninemonths ended September 30, 2003 travel expense declined by $10,000 or 5.8%to $160,000 from $170,000 for the same period in 2002.  The Company believes that the year-to-yeardecrease was related to the SARS epidemic in Asia.  With the SARS epidemic under control, travel during the thirdquarter ended September 30, 2003 increased as anticipated in order toassist with new customer designs and support of existing designs.  Professional expenses decreasedapproximately 10.2% or $6,600 and 42.6% or $135,700 to $58,500 and $182,700 forthe three and nine months ended September 30, 2003 compared to $65,100 and$318,400 for the same periods in 2002. For the three and nine months September 30, 2003, combined legaland accounting expenses decreased approximately 39.5% or $8,800 and 75.8% or$171,200, respectively, to $13,500 and $54,800 for the three and nine monthsended September 30, 2003 from $22,300 and $226,000 for the same periods in2002.  The Company expects that selling,general and administrative expenses will increase in absolute dollars in futureperiods as the Company expands its sales channels, marketing efforts andadministrative infrastructure, but to decline as a percentage of revenue.

 

InterestIncome (Expense)

 

Interestincome, net of expense, includes income from the Company’s cash and cash equivalentsand from investments and expenses related to its financing activities.  During the three months and nine monthsended September 30, 2003, the Company incurred net interest expense ofapproximately $3,500 and $500 compared to net interest income of approximately$4,500 and $18,800 generated for the same periods in 2002. The decrease in netinterest income for the three- and nine-month periods ended September 30,2003 was primarily due to use of funds.

 

Net Profit (Loss)

 

The Company reported a net profitof approximately $325,100 or $0.06 per basic and diluted common stock per sharefor the three- month period ended September 30, 2003 on a pre-splitbasis.  For the nine months endedSeptember 30, 2003, the Company reported a net profit of approximately$427,300 or $0.08 per basic and diluted common share on a pre-split basis.  This compares to a net profit ofapproximately $19,100 or $.00 per basic and diluted common share and a net lossof approximately $959,800 or $.018 per basic and diluted common share,respectively, for the three- and nine-month periods ended September 30,2002 on a pre-split basis.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s principalsource of liquidity at September 30, 2003 consisted of approximately$987,800 in cash and short-term investments and $400,000 in short-termfinancing.  This compares toapproximately $994,300 in cash and cash equivalents at December 31,2002.  This decrease in cash was due tofinancing of the Company’s $2.0 million increase in accounts receivable, an$835,000 increase in inventory and working capital requirements.  On September 19, 2003, the Companycompleted a $1 million private placement of its common stock to an accreditedinvestor.  On August 31, 2003, theexpiration date on the Company’s bank line of credit, the Company requested andwas granted a three-month extension.  InNovember 2003, the Company repaid the outstanding balance of $400,000under this bank line of credit.  Inaddition, the Company completed a subsequent $1 million private placement ofits common stock to a group of accredited investors on November 7, 2003.

 

Net cash used in operationsduring the nine-month period ended September 30, 2003 was approximately$1,791,000 compared to approximately $1,690,000 in the nine-month period endedSeptember 30, 2002.  As ofSeptember 30, 2003, inventory was approximately $974,000 compared toinventory of approximately $151,800 as of September 30, 2002.  Net accounts receivable was approximately$4.0 million at September 30, 2003, up from approximately $1.7 million asof September 30, 2002.  Thisincrease in accounts receivable was due to increased shipments of the Company’ssemiconductor products during the first three quarters of 2003.  As of September 30, 2003, three majorcustomers accounted for approximately 69% of the total accounts receivablebalance. The Company increased its reserve against bad debts to $40,000 as ofSeptember 30, 2003 from $25,000 as of December 31, 2002.  The Company believes this reserve issufficient at this time as a percentage of the Company’s receivables aresecured by letters of credit.

 

Net cash used in investingactivities for the nine months ended September 30, 2003 was approximately$53,000, compared to approximately $61,000 for the nine months ended September 30,2002.

 

Net cash provided byfinancing activities for the nine months ended September 30, 2003 wasapproximately $1.8 million, compared to $0 either used in or provided byfinancing activities for the nine months ended September 30, 2002.  During the three-month period endedSeptember 30, 2003, the Company received $75,000 net in cash from theexercise of warrants, $26,689 from the exercise of options by three employeesand $1 million from a private placement completed on September 19, 2003.  During the three-month period endedSeptember 30, 2002, 10,000 shares issued in connection with exercisedoptions were cancelled, thereby reducing the net cash received from financingactivities by approximately $6,000.  TheCompany believes that cash flow from operations and amounts that may be raisedfrom time to time in private offerings of its common stock will be sufficientto support operations and fund capital equipment requirements over the nexttwelve months.

 

On November 5, 2003 theCompany announced a 2 for 1 Stock Split in the form of a 100% stockdividend.  Each shareholder of 

 

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record as ofNovember 17, 2003 will receive one share for each share held.  The Company expects that certificatesreflecting the split will be distributed by December 11, 2003.  After the split the Company will haveapproximately 11 million shares outstanding.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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

 

The Companybelieves the following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its consolidated financialstatements.  The Company maintainsallowances for uncollectible accounts receivable for estimated losses resultingfrom the inability 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 excess or obsolete inventories based on the Company’sreview of inventory levels, projected future sales and comparison of actualmanufacturing costs to standard costs. If actual market conditions are less favorable than those projected bymanagement, additional allowances may be required. Property, plant andequipment, patents, trademarks and other intangible assets are amortized overtheir 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.

 

**CERTAINRISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND OUR COMMONSTOCK PRICE**

** **

There are a number of important factors that could cause our actualresults to differ materially from those indicated or implied by forward-lookingstatements. Factors that could cause or contribute to such differences includethose discussed below, as well as those discussed elsewhere in thisForm 10-QSB. We disclaim any intention or obligation to update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise except as may be required by law.

 

**RISKS RELATED TO OUR BUSINESS**

 

**WE HAVE HAD A HISTORY OF LOSSES AND MAY NOT BEABLE TO SUSTAIN PROFITABILITY.**

** **

As of September 30,2003, we had an accumulated deficit of approximately $10.7 million. Of thisamount, approximately $4 million was generated by the Company’s formerloudspeaker subsidiary, Apogee Acoustics, Inc., which discontinued operationsin 1994.  We recorded a net profit ofapproximately $325,100 and $427,300 for the three- and nine-month periods endedSeptember 30, 2003.  The Companyrecorded net losses of $1,065,000 for the year ended December 31, 2002,$895,000 in 2001, $1.9 million in 2000 and $1.1 million in 1999.  We may continue to incur net losses andgenerate negative cash flow in the future. We will need to continue to generate revenue to sustain profitabilityand positive cash flow.  Our ability togenerate future revenue and sustain profitability will depend on a number offactors, many of which are described throughout this risk factor section.  If we are unable to maintain profitability,our share price would likely decline.

 

**THE COMPANY HAS ONLY A SMALL NUMBER OF CUSTOMERS, AND THELOSS OF THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’SBUSINESS.**

 

During the nine months ended September 30, 2003, the Company derivedapproximately 71% of its product sales from three customers.  The loss of any of the Company’s customerswould have a material adverse effect on its business, financial condition andresults of operations.  The Companyintends to diversify its customer base in the coming months in order to reduceits dependence on a small number of customers. The Company may not be able to succeed in these efforts.

 

**OUR BUSINESS IS CONCENTRATED IN A LIMITED NUMBER OF MARKETSAND ANY SIGNIFICANT CHANGE IN THESE MARKETS COULD HAVE A MATERIAL ADVERSEEFFECT ON THE COMPANY’S BUSINESS.**

 

Approximately 99% of the Company’s product sales for the nine monthsended September 30, 2003 were to customers in Asia.  The outbreak of Severe Acute RespiratorySyndrome (SARS) during the first six months of 2003 has had an adverse effecton our sales in this region and it may continue to do so unless the outbreakremains under control. In addition, a significant percentage of the Company’sproduct sales are to manufacturers producing DVD Receivers.  This is a relatively new consumer electronicproduct with a limited sales history. The Company intends to develop new markets in order to diversify themarket applications of its products.

 

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

 

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

 

•             identifyemerging technological trends in our market

 

•             identifychanging consumer requirements

 

•             developor maintain competitive technology, including new product offerings

 

•             improvethe performance, features and reliability of our products, particularly inresponse to technological change and competitive offerings

 

•             bringtechnology to market quickly at cost-effective prices, and 

 

•             protectour intellectual property.

 

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

 

**WE MAY REQUIRE ADDITIONAL CAPITAL TOFUND OUR OPERATIONS AND RESEARCH AND DEVELOPMENT.**

 

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

 

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

 

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

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

** **

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

 

•                  availability andpricing from our suppliers;

 

•                  changesin the demand for our products by customers;

 

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

 

•                  rateand success of new customer development;

 

•                  changesin our pricing policies or those of our competitors;

 

•                  successin attracting, retaining and motivating qualified personnel; and

 

•                  changesin general economic conditions.

 

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

 

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

 

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

 

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

 

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

** **

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

 

•             theability to maintain foundry relationships, the failure of which could result insignificant delays in product introduction due to the time necessary toestablish new relationships

 

•             theloss of foundry priority that may result in limiting our ability to obtainproducts on schedule

 

•             limitedcontrol over product quality that could result in product returns and the lossof customers

 

•             inabilityto control manufacturing yield that could increase production costs, therebyreducing sales potential and operating margins, and

 

•             lackof access or control over new process and manufacturing technologies tomaintain product competitiveness in the market.

 

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

** **

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

 

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

 

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

 

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

 

The semiconductor and consumer audio industry is highly competitive,and we expect the intensity of the competition to increase. Many of 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 competitivetactic.  In addition, severaldevelopment stage companies are currently creating or developing technologies

 

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and products that compete with or are being designed to compete withour technologies and products.  Ourcompetitors may develop or market technologies or products that are moreeffective or more commercially attractive than our current or future products,or that may render our technologies or products less competitive 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.

 

**RISKS RELATEDTO OUR INTELLECTUAL PROPERTY**

** **

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

 

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

 

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

 

**WE MAY BE SUBJECT TO INTELLECTUALPROPERTY RIGHTS DISPUTES WHICH COULD DIVERT MANAGEMENT’S ATTENTION AND COULD BECOSTLY.**

 

The semiconductor and consumer audio industries are characterized byvigorous protection and pursuit of intellectual property rights. From time totime, we may receive notices of claims of infringement, misappropriation ormisuse of other parties’ proprietary rights. We cannot be sure that we willprevail in these actions, or that other actions alleging infringement by us ofthird-party patents, misappropriation or misuse by us of third-party trade secretsor the invalidity of one or more patents held by us will not be asserted orprosecuted against us, or that any assertions of infringement, misappropriationor misuse or prosecutions seeking to establish the invalidity of our patentswill not seriously harm our business. For example, in a patent or trade secret action, an injunction could beissued against us requiring that we withdraw particular products from themarket or necessitating that specific products offered for sale or underdevelopment be redesigned.

 

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

 

**RISKS RELATINGTO OUR COMMON STOCK**

** **

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

 

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

 

•             announcementsof technological innovations or new products, or competitive developments;

 

•             investorperceptions and expectations regarding our or our competitors’ products;

 

•             acquisitionsor strategic alliances by us or our competitors; and

 

•             thegain or loss of a significant customer or order.

 

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

 

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

 

As of September 30, 2003 our executive officers and directorsowned approximately forty-three percent (43.07 %) of the outstanding shares ofCommon Stock of the Company. Accordingly, such persons have sufficient voting power to substantiallyinfluence the outcome of matters that are put to a stockholder vote, includingthe election of a majority of the board of directors, and any merger,consolidation or sale of all or substantially all of our assets, and also havecontrol over our management and affairs. As a result of such voting power, these stockholders will be able toinfluence the outcome of corporate actions, including proxy contests, mergersinvolving us, tender offers, open market purchase programs or other purchasesof Common Stock that could give our stockholders the opportunity to realize apremium over the then prevailing market price for their shares of CommonStock.  This concentration of ownershipcould also adversely affect our stock’s market price.

 

**ITEM3 – QUANTITATIVE****AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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

 

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

 

**ITEM4 – CONTROLS****ANDPROCEDURES**

 

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

 

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

 

**PART II - OTHER INFORMATION**

** **

**ITEM 1 - LEGAL PROCEEDINGS**

 

None.

 

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

 

OnJuly 25, 2003, 50,000 shares of the Company’s Common Stock were issued toan investor pursuant to Stock Subscription Agreement in a private placementcompleted in June 2003.  Thepurchase price for these shares was $6.00 per share.  Theexemption from registration relied upon was Rule 506 under Regulation Dpromulgated under Section 4(2) of the Securities Act.

 

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On September19, 2003, 100,000 shares of the Company's Common Stock were issued to aninvestor pursuant to Stock Subscription Agreement in a private placementcompleted September 19, 2003.  Thepurchase price for these shares was $10.00 per share.  The exemption from registration relied upon was Rule 506 underRegulation D promulgated under Section 4(2) of the Securities Act.

 

During thethird quarter ended September 30, 2003, 30,000 shares of the Company's CommonStock were issued to investors and directors as a result of the exercise ofwarrants issued pursuant to a Stock Subscription Agreement in a privateplacement dated January 25, 2000.  Theexercise price for these shares was $2.50 per share.  The exemption from registration relied upon was Section 4(2)of the Securities Act of 1933, as amended.

 

**ITEM 3 - DEFAULTS****UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4 - SUBMISSION****OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

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

 

None.

 

**ITEM 6 - EXHIBITS****AND REPORTS ON FORM 8-K**

 

(a)   Exhibits:

 

See Exhibit Index

 

(b)   Reports on Form 8-K:

 

None.

 

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**SIGNATURES**

 

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

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

 

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21

FORM-10QSB

SEPTEMBER 30, 2003

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                           |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                      |
| 31                  |   | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 by Chief Executive Officer and Principal Financial Officer Regarding  Facts and Circumstances Relating to Exchange Act Filings. |
|                |   |                                                                                                                                                                                                      |
| 32                  |   | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 by Chief Executive Officer and Principal Financial Officer Regarding  Facts and Circumstances Relating to Exchange Act Filings. |

 

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