**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**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 March 31, 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 number000-30656**

 

| **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) |

 

Checkwhether the issuer: (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing 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 of May9, 2003, there were 5,381,585 shares of Common Stock, $.01 par value per share,outstanding.

 

TransitionalSmall Business Disclosure Format (Check one): Yes  o No  ý

 

 

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**APOGEE TECHNOLOGY, INC.**

 

**INDEX OFINFORMATION CONTAINED IN FORM 10-QSB FOR THEQUARTER ENDED MARCH 31, 2003**

 
| **PART I-FINANCIAL INFORMATION**                                                                    |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |
| Item 1 - Financial Statements (Unaudited)                                                           |
|                                                                                                | Condensed  Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 |
|                                                                                                | Condensed  Consolidated Statements of Operations and Accumulated Deficit for the Three  Months Ended March 31, 2003 and March 31, 2002 |
|                                                                                                | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2003 and March 31, 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                                                                                          |
|                                                                                                |
| Certifications                                                                                      |

 

2

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**APOGEE TECHNOLOGY, INC.AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                        |   | **MARCH 31,  2003** |          | **DECEMBER 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------------|------------------------|--------|
|                                                                                                                                        |   | **(Unaudited)**     |          |                   |   |
| **ASSETS**                                                                                                                                  |   |                |          |                   |   |
|                                                                                                                                        |   |                |          |                   |   |
| **Current assets**                                                                                                                          |   |                |          |                   |   |
| Cash and cash equivalents                                                                                                                   |   | **$**               | **613,341**   | ** **             | $      | 994,296 |   |
| Accounts receivable, net of allowance for doubtful accounts of  $30,000 in 2003 and $25,000 in 2002                                         |   | **2,467,679**       | ** **    | 2,030,492              |   |
| Inventories                                                                                                                                 |   | **219,819**         | ** **    | 138,702                |   |
| Prepaid expenses and other assets                                                                                                           |   | **103,843**         | ** **    | 102,772                |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| Total current assets                                                                                                                        |   | **3,404,682**       | ** **    | 3,266,262              |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| **Property and equipment, net of accumulated  depreciation of $325,525 in 2003 and $307,381 in 2002**                                       |   | **134,752**         | ** **    | 139,332                |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| **Other assets**                                                                                                                            |   |                | ** **    |                   |   |
| Digital amplifier patents, net of accumulated amortization of $88,371  in 2003 and $84,005 in 2002                                          |   | **92,043**          | ** **    | 93,256                 |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
|                                                                                                                                        |   | **$**               | **3,631,477** | ** **             | $      | 3,498,850 |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                               |   |                | ** **    |                   |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| **Current liabilities**                                                                                                                     |   |                | ** **    |                   |   |
| Accounts payable and accrued expenses                                                                                                       |   | **$**               | **1,236,760** | ** **             | $      | 999,919 |   |
| Current maturities of capital lease obligations                                                                                             |   | **13,420**          | ** **    | 16,514                 |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| Total current liabilities                                                                                                                   |   | **1,250,180**       | ** **    | 1,016,433              |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| **Capitalized lease obligations - net of current  maturities**                                                                              |   | **1,679**           | ** **    | 3,462                  |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| Total liabilities                                                                                                                           |   | **1,251,859**       | ** **    | 1,019,895              |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
| **Stockholders’ equity**                                                                                                               |   |                | ** **    |                   |   |
| Common stock, $.01 par value;  20,000,000 shares authorized, 5,381,585 and 5,370,585 issued and outstanding  in 2003 and 2002, respectively |   | **53,816**          | ** **    | 53,706                 |   |
| Additional paid-in capital                                                                                                                  |   | **13,639,816**      | ** **    | 13,599,926             |   |
| Accumulated deficit                                                                                                                         |   | **(11,314,014**     | **)**         | (11,174,677            | )      |
|                                                                                                                                        |   |                | ** **    |                   |   |
| Total stockholders’ equity                                                                                                             |   | **2,379,618**       | ** **    | 2,478,955              |   |
|                                                                                                                                        |   |                | ** **    |                   |   |
|                                                                                                                                        |   | **$**               | **3,631,477** | ** **             | $      | 3,498,850 |   |

 

*The accompanying notesare an integral part of these condensed consolidated financial statement.*

 

3

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**APOGEE TECHNOLOGY, INC.AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND ACCUMULATED DEFICIT

 
|                                                                |   | **THREE MONTHS ENDED  MARCH 31,** |            |
|---------------------------------------------------------------------|--------|-----------------------------------|-----------------|
|                                                                |   | **2003**                          |            | **2002** |   |
| **Revenues**                                                        |   |                              |            |   |   |
| Product sales                                                       |   | **$**                             | **1,519,593**   | ** ** | $ | 286,049 |   |
| Royalties                                                           |   | **319,999**                       | ** **      | 121,965 |   |
| Consulting                                                          |   | **—**                        | ** **      | 13,400 |   |
|                                                                |   | **1,839,592**                     | ** **      | 421,414 |   |
|                                                                |   |                              | ** **      |   |   |
| **Costs and expenses**                                              |   |                              | ** **      |   |   |
| Product sales                                                       |   | **1,068,244**                     | ** **      | 212,657 |   |
| Research and development                                            |   | **356,480**                       | ** **      | 393,212 |   |
| Selling, general and administrative                                 |   | **556,879**                       | ** **      | 591,646 |   |
|                                                                |   | **1,981,603**                     | ** **      | 1,197,515 |   |
|                                                                |   |                              | ** **      |   |   |
| **Loss before other income (expense)**                              |   | **(142,011**                      | **)**           | (776,101 | ) |
|                                                                |   |                              | ** **      |   |   |
| **Other income (expense)**                                          |   |                              | ** **      |   |   |
| Interest expense                                                    |   | **(499**                          | **)**           | (2,086 | ) |
| Interest income                                                     |   | **3,173**                         | ** **      | 9,190 |   |
|                                                                |   | **2,674**                         |            | 7,104 |   |
|                                                                |   |                              | ** **      |   |   |
| **Net loss**                                                        |   | **(139,337**                      | **)**           | (768,997 | ) |
|                                                                |   |                              | ** **      |   |   |
| **Accumulated deficit - beginning**                                 |   | **(11,174,677**                   | **)**           | (10,109,338 | ) |
|                                                                |   |                              | ** **      |   |   |
| **Accumulated deficit - ending**                                    |   | **$**                             | **(11,314,014** | **)** | $ | (10,878,335 | ) |
|                                                                |   |                              | ** **      |   |   |
| **Basic and diluted loss per common share**                         |   | **$**                             | **(0.03**       | **)** | $ | (0.15 | ) |
|                                                                |   |                              | ** **      |   |   |
| **Weighted average common shares outstanding - basic  and diluted** |   | **5,374,985**                     | ** **      | 5,223,829 |   |

 

*The accompanying notesare an integral part of these condensed consolidated financial statements.*

 

4

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**APOGEE TECHNOLOGY, INC.AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                           |   | **THREE MONTHS ENDED  MARCH 31,** |         |
|--------------------------------------------------------------------------------|--------|-----------------------------------|--------------|
|                                                                           |   | **2003**                          |         | **2002** |   |
| **Cash flows from operations**                                                 |   |                              |         |   |   |
| Net loss                                                                       |   | **$**                             | **(139,337** | **)** | $ | (768,997 | ) |
| *Adjustments to reconcile net loss to net cash used  in operating activities:* |   |                              | ** **   |   |   |
| Provision for doubtful accounts                                                |   | **5,000**                         | ** **   | 5,000 |   |
| Depreciation and amortization                                                  |   | **22,510**                        | ** **   | 23,888 |   |
| *Changes in operating assets and liabilities:*                                 |   |                              | ** **   |   |   |
| Accounts receivable                                                            |   | **(442,187**                      | **)**        | (176,501 | ) |
| Inventories                                                                    |   | **(81,117**                       | **)**        | 4,264 |   |
| Prepaid expenses                                                               |   | **(1,071**                        | **)**        | 8,302 |   |
| Accounts payable and accrued expenses                                          |   | **236,841**                       | ** **   | (175,961 | ) |
|                                                                           |   |                              | ** **   |   |   |
| Net cash used in operating activities                                          |   | **(399,361**                      | **)**        | (1,080,005 | ) |
|                                                                           |   |                              | ** **   |   |   |
| **Cash flows from investing activities**                                       |   |                              | ** **   |   |   |
| Purchases of property and equipment                                            |   | **(13,564**                       | **)**        | (9,455 | ) |
| Patent costs                                                                   |   | **(3,153**                        | **)**        | (23,101 | ) |
|                                                                           |   |                              | ** **   |   |   |
| Net cash used in investing activities                                          |   | **(16,717**                       | **)**        | (32,556 | ) |
|                                                                           |   |                              | ** **   |   |   |
| **Cash flows from financing activities**                                       |   |                              | ** **   |   |   |
| Proceeds from issuances of common stock                                        |   | **40,000**                        | ** **   | 8,000 |   |
| Repayment of capital lease obligations                                         |   | **(4,877**                        | **)**        | (8,698 | ) |
|                                                                           |   |                              | ** **   |   |   |
| Net cash provided by (used in) financing activities                            |   | **35,123**                        | ** **   | (698 | ) |
|                                                                           |   |                              | ** **   |   |   |
| **Decrease in cash and cash equivalents**                                      |   | **(380,955**                      | **)**        | (1,113,259 | ) |
|                                                                           |   |                              | ** **   |   |   |
| Cash and cash equivalents - beginning                                          |   | **994,296**                       | ** **   | 2,387,178 |   |
|                                                                           |   |                              | ** **   |   |   |
| **Cash and cash equivalents - ending**                                         |   | **$**                             | **613,341**  | ** ** | $ | 1,273,919 |   |

 

*The accompanying notesare an integral part of these condensed consolidated financial statement.*

 

5

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**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARY**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2003 AND 2002**

 

**1.****                        ****Basis of Presentation**

 

The condensed consolidated interimfinancial statements have been prepared in accordance with the requirements ofRegulation S-B and with the instructions to Form 10-QSB.  Accordingly, certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted. In the opinion of management, all adjustments (consisting only ofnormal recurring accruals) necessary to present fairly the financial position,results of operations and cash flows have been included.  The results of operations for thethree-month period ended March 31, 2003are not necessarily indicative of the operating results to be expected for theyear ending December 31, 2003.  Thesefinancial statements should be read in conjunction with the financialstatements and accompanying notes for the year ended December 31, 2002.

 

The balance sheet at December31, 2002 has been derived from the audited financial statements at that datebut does not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.

 

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

 

The Company is engaged in thedevelopment, design and marketing of digital amplifier technology and relatedsales of semi-conductor chips.  TheCompany is presently focused on computer based audio and entertainment mediaapplications derived from its all-digital amplifier design trademarked asDirect Digital Amplification (DDX®).

 

**2.****                       ****Pro Forma Information – Stock Options**

 

The Company has adopted only the disclosureprovisions of Financial Accounting Standard No. 123, “Accounting forStock-Based Compensation” (FAS123).  Itapplies APB Opinion No. 25, “Accounting For Stock Issued To Employees”, andrelated interpretations in accounting for its plan and does not recognizecompensation expense for its stock-based compensation plan other than forcertain options granted in 2001.

 

The following table illustrates theeffect on net loss and loss per share if the Company had applied the fair valuerecognition provisions of FAS123 to stock-based employees compensation.

 
|                                                                                                                                            |   | **Three Months Ended  March 31,** |         |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------------|
|                                                                                                                                            |   | **2003**                          |         | **2002** |   |
|                                                                                                                                            |   |                              |         |   |   |
| Net loss, as reported                                                                                                                           |   | **$**                             | **(139,337** | **)** | $ | (768,997 | ) |
|                                                                                                                                            |   |                              | ** **   |   |   |
| Deduct:     Total  stock-based employee compensation expense determined under fair value based  method for all awards* |   | **(396,215**                      | **)**        | (115,327 | ) |
|                                                                                                                                            |   |                              | ** **   |   |   |
| Pro-forma net loss**                                                                                                                            |   | **$**                             | **(535,552** | **)** | $ | (884,324 | ) |

 

6

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|                           |   | **Three Months Ended  March 31,** |      |
|--------------------------------|--------|-----------------------------------|-----------|
|                           |   | **2003**                          |      | **2002** |   |
|                           |   |                              |      |   |   |
| Loss per share:                |   |                              |      |   |   |
|                           |   |                              |      |   |   |
| As reported, basic and diluted |   | **$**                             | **(0.03** | ) | $ | (0.15 | ) |
|                           |   |                              |      |   |   |
| Pro-forma, basic and diluted   |   | **$**                             | **(0.10** | ) | $ | (0.17 | ) |

 

----

*                            All awardsrefers to awards granted, modified, or settled in fiscal periods beginningafter December 15, 1994 - awards for which the fair value was required to bemeasured under FAS 123.

 

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

 

**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:

 
|           |   | **March 31,  2003** |        | **December 31,  2002** |   |
|----------------|--------|---------------------|-------------|------------------------|--------|
|           |   | **(Unaudited)**     |        |                   |   |
|           |   |                |        |                   |   |
| Raw materials  |   | **$**               | **23,127**  |                   | $      | 33,441 |   |
| Finished goods |   | **196,692**         |        | 105,261                |   |
|           |   |                |        |                   |   |
|           |   | **$**               | **219,819** |                   | $      | 138,702 |   |

 

**4.****                        ****Bank Line of Credit**

 

On October 30, 2002, the Companyobtained a $1 million discretionary bank line-of-credit, which expires onAugust 31, 2003. Any borrowings under the line are due on demand. Borrowingsare limited to the lesser of $1 million or the sum of 75% of eligible domesticaccounts receivable and 80% of eligible foreign accounts receivable. The bank,at its discretion, may make additional advances up to $500,000, exclusive ofthe formula, but may not exceed $1 million. The line is secured by theCompany’s assets and has been personally guaranteed by two of the Company’sofficers/directors.  Interest is payablemonthly at the bank’s base rate plus one percent per annum. No amounts areoutstanding under the line of credit at March 31, 2003.

 

7

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

 

***PrivatePlacements***

 

During the three months ended March 31, 2003, the Company completeda 2002 private placement of 60,000 shares of common stock at $5 per share withthe issuance of the final 5,000 shares of common stock in February 2003.  Proceeds received were $25,000.

 

***StockOptions***

 

During the three months ended March 31, 2003, the Board of Directorsawarded options to purchase 382,650 shares at exercise prices ranging from$5.42 to $8.65, to certain employees and directors.  These options were granted under the 1997 Incentive Stock OptionPlan.  The options vest over five yearsbeginning at the first anniversary date of the grant.

 

***Other***

 

The Company also issued 6,000 shares ofcommon stock as a result of exercised warrants during the quarter. The exerciseprice was $2.50 per share.

 

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

 

On February 7, 2001, theCompany signed an exclusive license agreement with ST Microelectronics NV(“ST”) of the Netherlands.  Theagreement calls for ST to use certain intellectual property rights owned orcontrolled by the Company to commercialize and sell related products utilizingsuch technology.  In consideration forthis license, ST paid to the Company a one-time license fee of $1.6 million incash 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 hasrecognized $220,000 of the credit for future design services. During thequarter ended March 31, 2003 the Company did not recognize any suchincome.

 

8

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**7.****                        ****Concentrations**

 

During the three months endedMarch 31, 2003, approximately 92% of the Company’s product sales were derivedfrom three customers (53%, 28% and 11%, respectively).

 

Five of the Company’s major customersaccounted for approximately 98% of the total accounts receivable balance at March 31, 2003.

 

Approximately 99% of theCompany’s product sales for the three months ended March 31, 2003 were tocustomers in Asia.

 

The Company maintains accountswith financial institutions.  Balancesusually exceed the maximum coverage provided by the Federal Deposit InsuranceCorporation on insured depositor accounts.

 

Two of the Company’s majorvendors accounted for approximately 98% of total purchases for the three monthsended March 31, 2003.

 

9

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**ITEM 2****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**GENERAL**

 

Thefollowing Management’s Discussion and Analysis of the Company’s Financial Conditionand Results of Operations for the three- month periods ended March 31, 2003 andMarch 31, 2002 should be read in conjunction with the Company’s FinancialStatements and related Notes included elsewhere in this Quarterly Report onForm 10-QSB. This discussion contains, in addition to historical statements,forward-looking statements that involve risks and uncertainties. The Company’sactual results could differ significantly from the results discussed in theforward-looking statements. Factors that could cause or contribute to suchdifferences include the factors discussed in the section titled “Certain RiskFactors That May Affect Future Results of Operations And Our Common StockPrice” as well as other factors described in the Company’s Annual Report onForm 10-KSB for the year ended December 31, 2002. The Company does not intendto update any such forward-looking statements.

 

**INTRODUCTION**

 

The Company designs, develops and markets semiconductor products andintegrated circuits (ICs) incorporating the company’s patented Direct DigitalAmplification (DDX®) technology. DDX-based IC products are used in a range ofaudio applications including:  hometheater systems, powered speakers, car audio, commercial audio, and PCmulti-media. Under a licensing agreement with STMicroelectronics NV (ST), theCompany is developing and providing intellectual property to be used in royaltybearing products produced by ST.  Inaddition, the Company is working under a development agreement with ST todevelop and market new semiconductor products that leverage Apogee’s DDXtechnology and ST’s intellectual property and semiconductor design, developmentand manufacturing capability.  ST iscurrently shipping five royalty bearing DDX-based semiconductor products. TheCompany has developed and is marketing eight different DDX-based semiconductorproducts and has additional products in development. The Company markets DDXproducts 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 incurred a net loss ofapproximately $139,300 for the three months ended March 31, 2003, as comparedto a net loss of approximately $769,000 for the three months ended March 31,2002. The lower net loss for the three-month period ended March 31, 2003 wasthe result of increased revenue from the sales of the Company’s semi-conductorproducts as well as increased royalties earned under the ST licensingagreement.  As of March 31, 2003,the Company had an accumulated deficit of approximately $11.3 million, ascompared to a deficit of approximately $11.2 million as of December 31, 2002.Of this accumulated deficit, approximately $4 million was attributable to theCompany’s now defunct loudspeaker business, which was discontinued in 1994. TheCompany’s net losses and accumulated deficit (since 1995) result primarily fromresearch costs associated with the Company’s efforts to develop and market itsDDX technology.

 

Asof March 31, 2003, the Company had 27 employees, up from 22 as of March 31,2002.

 

Duringthe three-month period ended March 31, 2003, three customers represented, inthe aggregate, approximately 92% 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’ssales and marketing activities on a worldwide basis.

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

Thefollowing selected financial data for the three-month periods ended March 31,2003 and March 31, 2002 have been derived from the Company’s financialstatements. Any trends reflected by the following table may not be indicativeof future results.

 

|                                        |   | **For the Three Months ended  March 31,** |       |
|---------------------------------------------|--------|-------------------------------------------|------------|
|                                        |   | **2003**                                  |       | **2002** |   |
| Statement of Operations Data:               |   |                                      | ** ** |   | ** ** |
| Revenue                                     |   | $                                         | 1,839,592  |   | $ | 421,414 |   |
| Costs and expenses                          |   | 1,981,603                                 |       | 1,197,515 |   |
| Other income (expense)                      |   | 2,674                                     |       | 7,104 |   |
| Net Profit (Loss)                           |   | $                                         | (139,337   | ) | $ | (768,997 | ) |
|                                        |   |                                      |       |   |   |
| Shares Outstanding                          |   | 5,381,585                                 |       | 5,228,051 |   |
|                                        |   |                                      |       |   |   |
| Balance Sheet Data:                         |   |                                      |       |   |   |
| Total Assets                                |   | $                                         | 3,631,477  |   | $ | 2,379,095 |   |
| Stockholders’ equity                   |   | $                                         | 2,379,619  |   | $ | 1,980,941 |   |
| Profit (Loss) per share (basic and diluted) |   | $                                         | (0.03      | ) | $ | (0.15 | ) |

 

10

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**RESULTS OF CONTINUING OPERATIONS OF THE COMPANY**

 

Thefollowing table sets forth, for the periods indicated, the percentage of totalrevenue represented by certain revenue and expense items.  The table and the discussion below should beread in conjunction with the consolidated financial statements and notesthereto that appear elsewhere in this report.

 

|                              |   | **For the Three Months Ended  March 31,** |       |
|-----------------------------------|--------|-------------------------------------------|------------|
|                              |   | **2003**                                  |       | **2002** |   |
|                              |   |                                      | ** ** |   | ** ** |
| Product Sales                     |   | 82.60                                     | %          | 67.88 | % |
| Royalties                         |   | 17.40                                     |       | 28.94 |   |
| Consulting                        |   | 0.00                                      |       | 3.18 |   |
|                              |   |                                      |       |   |   |
| Cost of Sales                     |   | 58.07                                     |       | 50.46 |   |
| Research and Development          |   | 19.38                                     |       | 93.31 |   |
| Sales, General and Administrative |   | 30.27                                     |       | 140.40 |   |
|                              |   |                                      |       |   |   |
| Operating Loss                    |   | (7.72                                     | )%         | (184.17 | )% |
| Other Income (Expense)            |   | 0.15                                      |       | 1.69 |   |
| Net Loss                          |   | (7.57                                     | )%         | (182.48 | )% |

 

QuarterlyPeriod Ended March 31, 2003 compared with Quarterly Period Ended March 31,2002.

 

Revenues

 

TheCompany derives its revenue from three sources: (1) product sales, whichconsist of merchandise sales made either directly to manufacturers or todistributors that are fulfilled from the Company’s warehouses in Hong Kongand/or Norwood, Massachusetts, net of returns; (2) royalty revenue, whichconsists of royalties paid by STMicroelectronics under the terms of thelicensing agreement signed in February 2001 and (3) consulting revenue.

 

Totalrevenue increased by approximately 336% or $1.4 million to $1.8 million for thethree months ended March 31, 2003 from $421,400 for the three months endedMarch 31, 2002.

 

Revenuesfrom the sale of the Company’s products, consisting of semiconductor IC’s aswell as DDX evaluation and reference boards, increased by 431% or $1.2 millionto $1.5 million for the three months ended March 31, 2003 from $286,000 for thethree months ended March 31, 2002. This increase in Product Revenue wasprimarily due to growth in the sale of the Company’s semiconductor productsparticularly in Asia.

 

Revenuefrom non-product related items accounted for approximately 17% of total revenuefor the three months ended March 31, 2003, compared to revenue for non-productrelated items of approximately 32% of total revenue for the same period in2002.  Revenue from non-product itemsincreased approximately 136% or $184,600 to approximately $320,000 for thethree months ended March 31, 2003 from $135,400 for the three months endedMarch 31, 2002.  During the three monthsended March 31, 2003, the Company recorded net royalty payments under the STagreement of approximately $320,000, compared to royalty payments of $122,000for the same period in 2002.

 

TotalRevenue for the Three Months Ended March 31, 2003 and 2002 consisted of:

 
|            |   | **2003** |      | **2002** |       |
|-----------------|--------|----------|-----------|----------|------------|
| Product Revenue |   | $        | 1,519,593 |     | $          | 286,049 | ** ** |
| Royalties       |   | 319,999  |      | 121,965  | ** ** |
| Consulting      |   | -0-      |      | 13,400   | ** ** |
|            |   |     |      |     | ** ** |
| Total:          |   | $        | 1,839,592 |     | $          | 421,414 | ** ** |

 

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Costof Revenue

 

Costof revenue was approximately $1.1 million for the three months ended March 31,2003 compared to approximately $212,700 for the same period in 2002. Cost ofRevenue includes cost of purchasing finished semiconductor chips and costsassociated with assembly, test and shipping of those products as well ascustoms and storage fees associated with warehousing a large portion of theCompany’s semiconductor products in Asia. This increase in the cost of revenue is primarily attributable to costsrelating to increased sales of the Company’s semiconductor products as well asthe establishment of a warehousing facility in Asia.  For the three months ended March 31, 2003, the Company recorded agross margin of 30% from product sales compared to a gross margin of 26% forthe same period in 2002.  The Companyanticipates that the cost of revenue will continue to increase in dollaramounts as the Company continues increasing its product sales.

 

Researchand Development (“R&D”) Expenses

 

Research and development expenses consist primarily of salaries andrelated expenses in the design, development and technical support of theCompany’s products as well as direct support to current and potential customersin the development of consumer products utilizing DDX semiconductorproducts.  Research anddevelopment expenses decreased approximately 9% or $36,700 to $356,500 for thethree months ended March 31, 2003, compared to approximately $393,200 for thesame period in 2002.  This decrease wasrelated to the elimination of the use of third party consultants.  Human resources increased 7.6% or $23,400 to$329,800 for the three months ended March 31, 2003 compared to $306,400 for thesame period in 2002.  During the threemonths ended March 31, 2003 the Company’s research and development teamconsisted of 16 engineers and technical support staff compared to 15 for thesame period in 2002.  The Companycontinues to invest in the development of its next generation IC’s as well asthe continued support to the Company’s customers and potential customers.  During the first quarter of 2003 the Companycompleted and released two new semiconductor products, the DDX-8228 ControllerIC and the DDX2050 Power IC.  Thesedevices were developed to meet the needs of the lower power multi-channel audioapplications.  Due to the technicalnature of the Company’s products, engineering and design support are criticalparts of the Company’s strategy during both the development of its products andthe support to its customers from product design to final production.  Management anticipates that it will continueto commit resources to research, development and design activities.  It expects these expenses to increase, butto decline as a percentage of revenue.

 

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 the Hong Kongsales office, opened in April 2002. General and administrative costs consist primarily of executive andadministrative salaries, professional fees and other associated corporateexpenses. The change in SG & A, described below, was attributableprincipally to an increase in travel and support to the Company’s Hong KongOffice offset by a decrease in professional fees as well as a reduction indomestic human resources.  SG&Aexpenses decreased approximately 6% or $34,700 to $556,900 for the three monthsended March 31, 2003 compared to $591,600 for the same period in 2002.  Human resource costs decreased approximately13% or $27,800 to approximately $194,000 for the three months ended March 31,2003, compared to $221,800 during the same period in 2002.  Travel expense increased approximately 17%or $9,800 to $68,600 for the three months ended March 31, 2003 compared to$58,800 for the same period in 2002. This increase was primarily due to increased travel to the Far Eastpredominantly for customer design and support. Professional expenses decreased approximately 55% or $93,100 to $77,300for the three months ended March 31, 2003 compared to $170,400 for the sameperiod in 2002.  For the three monthsended March 31, 2003, combined legal and accounting expenses decreasedapproximately 77% or $110,900 to $33,700, compared to $144,600 for the threemonths ended March 31, 2002.  Salessupport increased approximately 432% or $90,600 to $111,600 for the threemonths ended March 31, 2003 compared to $21,000 for the same period in2002.  This increase reflects theopening of the Company’s Hong Kong office in April 2002 and the continuedutilization of a sales consultant in Taiwan. The Company expects that selling, general and administrative expenseswill increase in absolute dollars in future periods as the Company expands itssales channels, marketing efforts and administrative infrastructure, but todecline as a percentage of revenue.

 

InterestIncome (Expense)

 

Interestincome, net of expense, includes income from the Company’s cash and cashequivalents and from investments and expenses related to its financingactivities. During the three months ended March 31, 2003, the Company generatednet interest income of approximately $2,700 compared to net interest income ofapproximately $7,100 during the same period in 2002.  The decrease in  netinterest income for the three-month period ended March 31, 2003 was primarilydue to use of funds and lower interest rates on cash and short-terminvestments.

 

NetProfit (Loss)

 

TheCompany’s net loss for the three months ended March 31, 2003 was approximately$139,300 or $.03 per basic and diluted common share, compared to a loss ofapproximately $769,000 or $.15 per basic and diluted common share for the threemonths ended March 31, 2002.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

TheCompany’s principal source of liquidity at March 31, 2003 consisted ofapproximately $613,000 in cash and short-term investments and no debt.  This compares to approximately $994,300 incash and cash equivalents at December 31, 2002.  This decrease in cash was due to financing of the Company’s $2.5million in Accounts Receivable as well as working capital requirements.

 

Netcash used in operations during the three-month period ended March 31, 2003 wasapproximately $399,400 compared to approximately $1,080,000 in the three-monthperiod ended March 31, 2002.  As ofMarch 31, 2003, inventory was approximately $219,800 compared to inventory ofapproximately $416,000 as of March 31, 2002. Net accounts receivable was approximately $2.5 million at March 31,2003, up from approximately $404,000 as of March 31, 2002.  This increase in accounts receivable was dueto increased shipments of the Company’s semiconductor products during the firstquarter of 2003.  As of March 31, 2003,five major customers accounted for approximately 98% of the total accountsreceivable balance. The Company increased its reserve against bad debts to$30,000 as of March 31, 2003 from $25,000 as of December 31, 2002.  The Company believes this reserve issufficient at this time as a significant percentage of the Company’sreceivables are secured by letters of credit.

 

Netcash used in investing activities for the three months ended March 31, 2003 wasapproximately $16,700, compared to approximately $32,600 for the three monthsended March 31, 2002.

 

Netcash provided by financing activities for the three months ended March 31, 2003was approximately $35,100, compared to under $1,000 used in financingactivities for the three months ended March 31, 2002.  During the three-month period ended March 31, 2003, the Companyreceived $15,000 net in cash from the exercise of warrants as well as $25,000as final payment on a private placement from December 2002.  During the period ended March 31, 2002, theCompany received $8,000 in cash from the exercise of options by twoemployees.  The Company believes thatcash flow from operations and the amounts available under its working capitalline of credit, secured in October 2002, are sufficient to support operationsand fund capital equipment requirements over the next twelve months.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Thepreparation of the consolidated financial statements requires the Company tomake estimates and judgments that affect the reported amounts of assets,liabilities and expenses.  On anon-going basis, the Company evaluates its estimates, including those related touncollectible accounts receivable, inventories, intangibles and other long-livedassets.  The Company bases its estimateson historical experience and on various other assumptions that are believed tobe reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements. The Company maintains allowances for uncollectibleaccounts receivable for estimated losses resulting from the inability of itscustomers to make required payments. If the financial condition of theCompany’s customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required. The Companymaintains allowances for estimated excess or obsolete inventories based on theCompany’s review of inventory levels, projected future sales and comparison ofactual manufacturing costs to standard costs. If actual market conditions areless favorable than those projected by management, additional allowances may berequired. Property, plant and equipment, patents, trademarks and otherintangible assets are amortized over their estimated useful lives. Useful livesare based on management’s estimates over the period that such assets willgenerate revenue. Intangible assets are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying value of an asset maynot be recoverable. Future adverse changes in market conditions or pooroperating results of underlying capital investments or intangible assets couldresult in losses or an inability to recover the carrying value of such assets,thereby possibly requiring an impairment charge in the future.

 

**CERTAIN RISKFACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND OUR COMMON STOCK PRICE**

 

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

 

**RISKS RELATEDTO OUR BUSINESS**

 

**WE HAVE AHISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR SUSTAINPROFITABILITY.**

 

As of March 31, 2003, we had an accumulated deficit of approximately$11.3 million. Of this amount, approximately $4 million was generated by theCompany’s former loudspeaker subsidiary, Apogee Acoustics, Inc., which discontinued

 

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operations in 1995.  We incurrednet losses of approximately $139,300 for the three months ended March 31, 2003,$1,065,000 for the year ended December 31, 2002, $895,000 for the year endedDecember 31, 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 achieve and sustainprofitability and positive cash flow.  Ourability to generate future revenue and achieve and sustain profitability willdepend on a number of factors, many of which are described throughout this riskfactor section.  If we are unable toachieve or maintain profitability, our share price would likely decline.

 

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

 

Duringthe three months ended March 31, 2003, the Company derived approximately 92% ofits product revenues from three customers. The loss of any of the company’s customers would have a material adverseeffect on the Company’s business, financial condition and results ofoperations.  The Company intends todiversify its customer base in the coming months in order to reduce itsdependence on a small number of customers. The Company may not be able to succeed in these efforts.

 

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

 

Approximately69% of the Company’s product sales for the three months ended March 31, 2003were to customers in the Far East (China, Hong Kong, Japan and Korea). Therecent outbreak of Severe Acute Respiratory Syndrome (SARS) may have an adverseeffect on our future sales in this region. In addition, a significantpercentage of the Company’s product sales are to manufacturers producing DVDReceivers. This is a new consumer electronic product with a limited saleshistory. The Company intends to develop new markets in order to diversify themarket applications of its products.

 

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

 

Thelife cycle of the technology and any future products developed by us may belimited by the emergence of new products and technologies, changes in consumerpreferences and other factors. Our future performance will depend on ourability to consistently:

 

•        identify emerging technological trendsin our market

 

•        identify changing consumer requirements

 

•        develop or maintain competitivetechnology, including new product offerings

 

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

 

•        bring technology to market quickly at cost-effective prices, and

 

•        protect our intellectual property.

 

Therecan be no assurance that we will be successful in developing and marketing newproducts that respond to technological and competitive developments andchanging customer needs, or that such products will gain market acceptance andbe incorporated into the technology or products of third parties. Anysignificant delay or failure to develop new enhanced technologies, includingnew product offerings, and any failure of the marketplace to accept any newtechnology and product offerings would have a material adverse effect on ourbusiness, financial condition and results of operations.

 

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

 

Becausewe have historically had losses and only a limited amount of cash has beengenerated from operations, we have funded our operating activities to dateprimarily from the sale of securities. We will likely require additionalcapital in the future, which may be in the form of additional sales ofsecurities. The additional capital may not be readily available to us onfavorable terms, if at all. The sale of securities will result in dilution toour current stockholders’ ownership in the Company.

 

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

 

Partof our business strategy is to expand our licensing activities with ST and toenter into licensing relationships with other companies in order to offerproducts to a larger customer base than could be reached through our owndevelopment and marketing efforts. We believe that such relationships canaccelerate market penetration of our products and technologies, while limitingour manufacturing exposure and sales and marketing costs. However, there can beno assurance that we will be able to expand or maintain

 

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ourexisting licensing relationships or establish new licensing relationships oncommercially reasonable terms, if at all. Any future inability by us tomaintain our licensing relationships or to enter into additional licensingrelationships, or the failure of one or more of our licensing relationships tocontribute to the development and maintenance of a market for our products,could have a material adverse effect on our business, operating results andfinancial condition.

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE**

 

Wehave experienced fluctuations in our quarterly operating results in the pastand it is likely that these fluctuations will continue in the future. Thesefluctuations are caused by many factors, including, but not limited to:

 

•        availability and pricing from oursuppliers;

 

•        changes in the demand for our productsby customers;

 

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

 

•        rate and success of new customerdevelopment;

 

•        changes in our pricing policies or thoseof our competitors;

 

•        success in attracting, retaining andmotivating qualified personnel; and

 

•        changes in general economic conditions.

 

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

 

Fluctuationsin our operating results may also result in fluctuations in our common stockprice. In such event, the trading price of our common stock would likely sufferand adversely affect our ability to raise capital and the value of yourinvestment in the Company.

 

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

 

Wemay not be successful in recruiting and retaining executive officers and otherkey management and technical personnel. The competition for employees with thenecessary high level of technical expertise to design and market our productsis intense, particularly in eastern Massachusetts. We will need to hire anumber of additional technical personnel if we are to increase the rate atwhich we develop new products. Because competition for highly skilled technicalpersonnel is so intense, companies in Apogee’s industry are subject from timeto time to complaints brought by competitors alleging interference withcontractual relations or wrongful hiring of employees. Such lawsuits may becostly, may divert management attention and resources from the operation of ourbusiness, and may therefore adversely affect our financial condition andresults of operations.  In addition, theloss of the management and technical expertise of our senior management couldseriously harm us.

 

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

 

Wehave no manufacturing capabilities, nor do we have plans to establish any suchcapabilities. Accordingly, we utilize outside semiconductor foundries tomanufacture our semiconductor products. There are significant risks associatedwith our reliance on these foundries that can adversely affect our business,operating results and financial condition. These risks include:

 

•        the ability to maintain foundry relationships, the failure of whichcould result in significant delays in product introduction due to the timenecessary to establish new relationships

 

•        the loss of foundry priority that mayresult in limiting our ability to obtain products on schedule

 

•        limited control over product qualitythat could result in product returns and the loss of customers

 

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

 

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

 

15

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

 

Ourproducts are based on recently developed technology and are manufactured usingstate-of-the-art manufacturing processes. Our approach to product qualificationand testing may not fully evaluate or identify product characteristics ordefects that could adversely affect the product’s ability to operate in theintended application. If such defects or characteristics are discovered after installation,product revenue might be significantly delayed and our ability to maintainexisting customers and to retain 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.**

 

Weface challenges in persuading manufacturers to adopt our products using our newDDX amplifier technology. Traditional amplifiers use design approachesdeveloped in the 1930s. These approaches are still used in most amplifiers andengineers are familiar with these design approaches. In order to adopt ourproducts, manufacturers and engineers must understand and accept our newtechnology. In addition, our amplifier technology may be more expensive forsome applications than the traditional amplifier technology. For these reasons,prospective customers may be reluctant to adopt our technology.

 

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

 

Thesemiconductor and consumer audio industry is highly competitive, and we expectthe intensity of the competition to increase. Many of our competitors havegreater financial, technical, research, marketing, sales, distribution, serviceand other resources than we do. Moreover, our competitors may offer broaderproduct lines and have greater name recognition than we do, and may offerdiscounts as a competitive tactic. In addition, several development stagecompanies are currently creating or developing technologies and products thatcompete with or are being designed to compete with our technologies andproducts. Our competitors may develop or market technologies or products thatare more effective or more commercially attractive than our current or futureproducts, or that may render our technologies or products less competitive orobsolete. Accordingly, if competitors introduce superior technologies orproducts and we cannot make enhancements to our technologies and productsnecessary for them to remain competitive, our competitive position, and inturn, our business, revenues and financial condition, will be seriously harmed.

 

**RISKS RELATED TO OUR INTELLECTUAL PROPERTY**

 

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

 

Ourbusiness depends, in part, on our ability to protect our intellectual property.We rely primarily on patent, copyright, trademark and trade secret laws toprotect our proprietary technologies. We cannot be sure that such measures willprovide meaningful protection for our proprietary technologies and processes.We have two issued United States patents and two pending patent applications.We cannot be sure that any existing or future patents will not be challenged,invalidated or circumvented, or that any right granted thereunder would provideus meaningful protection. The failure of any patents to provide protection toour technology would make it easier for our competitors to offer similarproducts.

 

Wealso generally enter into confidentiality agreements with our employees andstrategic partners, and generally control access to and distribution of ourdocumentation and other proprietary information. Despite these precautions, itmay be possible for a third party to copy or otherwise obtain and use ourproducts or technology without authorization, develop similar technologyindependently or design around our patents. In addition, effective copyright,trademark and trade secret protection may be unavailable or limited in certainforeign countries.

 

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

 

Thesemiconductor and consumer audio industry is characterized by vigorousprotection and pursuit of intellectual property rights. From time to time, wemay receive notices of claims of infringement, misappropriation or misuse ofother parties’ proprietary rights. We cannot be sure that we will prevail inthese actions, or that other actions alleging infringement by us of third-partypatents, misappropriation or misuse by us of third-party trade secrets or theinvalidity of one or more patents held by us will not be asserted or prosecutedagainst us, or that any assertions of infringement, misappropriation or misuseor prosecutions seeking to establish the invalidity of our patents will notseriously harm our business. For example, in a patent or trade secret action,an injunction could be issued against us requiring that we withdraw particularproducts from the market or necessitating that specific products offered forsale or under development be redesigned.

 

Irrespectiveof the validity or successful assertion of various claims of infringement,misappropriation or misuse of other parties’ proprietary rights, we would likelyincur significant costs and diversion of our management and personnel resourceswith respect to the defense of such claims, which could seriously harm ourbusiness. If any claims or actions are asserted against us, we may seek to

 

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obtaina license under a third party’s intellectual property rights. We cannot be surethat under such circumstances a license would be available on commerciallyreasonable terms, if at all. Moreover, we often incorporate the intellectualproperty of our strategic customers into our designs, and we have certainobligations with respect to the non-use and non- disclosure of suchintellectual property. We cannot be sure that the steps taken by us to preventour, or our customers’, misappropriation or infringement of the intellectualproperty will be successful.

 

**RISKS RELATING TO OUR COMMONSTOCK**

 

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

 

Thestock markets have experienced extreme price and volume fluctuations that haveaffected and continue to affect the market prices of equity securities of manytechnology companies. These fluctuations often have been unrelated ordisproportionate to the operating performance of those companies. We expectthat the market price of our Common Stock will fluctuate as a result ofvariations in our quarterly operating results, or for other reasons that arenot related to the performance of our business. These fluctuations may beexaggerated if the trading volume of our Common Stock is low. In addition, dueto the technology-intensive nature of our business, the market price for ourCommon Stock may rise and fall in response to various factors including:

 

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

 

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

 

•        acquisitions or strategic alliances byus or our competitors; and

 

•        the gain or loss of a significantcustomer or order.

 

Inaddition, market fluctuations, as well as general economic, political andmarket conditions such as recessions, interest rate changes or internationalcurrency fluctuations, may negatively impact the market price of our CommonStock.

 

**BECAUSE A LIMITED NUMBER OF PERSONS,INCLUDING DIRECTORS AND EXECUTIVE OFFICERS, OWN A MAJORITY OF OUR COMMON STOCKAND THEREFORE CONTROL OUR COMPANY, DECISIONS MAY BE MADE BY THEM THAT MAY BEDETRIMENTAL TO OTHER STOCKHOLDERS.**

 

Asof March 31, 2003 our executive officers and directors owned approximatelyfifty-seven percent (57.26%) of the outstanding shares of Common Stock of theCompany. Accordingly, such persons have sufficient voting power to control theoutcome of matters that are put to a stockholder vote, including the electionof a majority of the board of directors, and any merger, consolidation or saleof all or substantially all of our assets, and also have control over ourmanagement and affairs. As a result of such voting power, these stockholderswill be able to control the outcome of corporate actions, including proxycontests, mergers involving us, tender offers, open market purchase programs orother purchases of Common Stock that could give our stockholders theopportunity to realize a premium over the then prevailing market price fortheir shares of Common Stock. This concentration of ownership could alsoadversely affect our stock’s market price.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

TheCompany’s financial instruments include: cash, cash equivalents, accountsreceivable and accounts payable.  AtMarch 31, 2003, the carrying value of the Company’s cash, cash equivalents,accounts receivable and accounts payable approximate fair values given theshort maturity of these instruments.

 

Althoughthe Company’s sales are predominately to international markets, the Companybelieves that it does not have material foreign currency exchange rate risksince international sales are in U.S. dollars and material purchases fromforeign suppliers are typically also denominated in U.S. dollars.  Additionally, the functional currency of theCompany’s foreign sales office is the U.S. dollar.

 

Itis the Company’s policy not to enter into derivative financial instruments forspeculative purposes.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

(a)          Evaluation of Disclosure Controls andProcedures.  The Company’s chiefexecutive officer and principal financial officer have reviewed and evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rules 13-14 (c) and 15d-14 (c)) as of a date withinninety days before the filing date of this quarterly report.  Based on that evaluation, the chiefexecutive officer and principal financial officer have concluded that the Company’scurrent disclosure controls and procedures are adequate and effective to ensurethat material information relating to the Company was made known to them byothers, particularly during the period in which this Quarterly Report on Form10-QSB was being prepared.

 

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(b)         Changes in Internal Controls.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation, nor were there anysignificant deficiencies or material weaknesses in the Company’s internalcontrols.  Accordingly, no correctiveactions were required or undertaken.

 

**PARTII - OTHER INFORMATION**

 

**ITEM 1 - LEGAL PROCEEDINGS**

 

Notapplicable.

 

**ITEM 2 - CHANGES IN SECURITIES**

 

OnMarch 6, 2003, 6,000 shares of the Company’s Common Stock were issued to aninvestor as a result of the exercise of warrants issued pursuant to a StockSubscription Agreement in a private placement dated January 25, 2000.  The exercise price for these shares was$2.50 per share.  The exemption fromregistration relied upon was Section 4(2) of the Securities Act of 1933, asamended (the “Securities Act”).

 

OnFebruary 12, 2003, 5,000 shares of the Company’s Common Stock were issued to aninvestor pursuant to Stock Subscription Agreement in a private placement inDecember 2002.  The aggregate purchaseprice for these shares was $5.00 per share. The exemption from registration relied upon was Rule 506 under RegulationD promulgated under Section 4(2) of the Securities Act.

 

OnJanuary 21, 2003, the Company granted options to two directors to purchase upto 50,000 shares each of the Company’s Common Stock at an exercise price of$5.42 per share under the 1997 Employee, Director and Consultant Stock OptionPlan (the “Plan”).

 

OnFebruary 3, 2003, the Company granted options to employees to purchase up to anaggregate of 120,150 shares of the Company’s Common Stock at an exercise priceof $7.00 per share, under the Plan.

 

OnMarch 18, 2003, the Company granted options to employees and directors topurchase up to an aggregate of 62,500 shares of the Company’s Common Stock atan exercise price of $8.65 per share, under the Plan.

 

OnMarch 27, 2003, the Company granted options to an employee to purchase up to100,000 shares of the Company’s Common Stock at an exercise price of $8.16 pershare, under the Plan.

 

OnMarch 31, 2003, the Board of Directors, subject to stockholder approval,authorized an increase in shares available under the Plan from 1,550,000 to2,050,000.

 

**ITEM 3 - DEFAULTS UPONSENIOR SECURITIES**

 

None.

 

**ITEM 4 - SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5 - OTHER INFORMATION**

 

None.

 

**ITEM 6 - EXHIBITS ANDREPORTS ON FORM 8-K**

 

(a)             Exhibits:

 

See Exhibit Index

 

(b)            Reports onForm 8-K:

 

Therewere no reports on Form 8-K filed in the three months ended March 31, 2003.

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, asamended, the Registrant has caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

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

 

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CERTIFICATIONPURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

 

I, Herbert M.Stein, certify that:

 

1.                                       I havereviewed this quarterly report on Form 10-QSB of Apogee Technology, Inc.;

 

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made know to usby others within those entities, particularly during the period in which thisquarterly report is being prepared.

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              Presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | Date:   May 14, 2003                                                       |
|--------|---------------------------------------------------------------------------------|
|   |                                                                            |
|   | /s/ Herbert M. Stein                                                            |   |
|   | Herbert M. Stein, Chairman of the Board,  President and Chief Executive Officer |

 

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CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, DavidSpiegel, certify that:

 

1.               I havereviewed this quarterly report on Form 10-QSB of Apogee Technology, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 for the registrant and we have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made know to usby others within those entities, particularly during the period in which thisquarterly report is being prepared.

 

b.              Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c.               Presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalent function):

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | Date:  May 14, 2003                                                  |
|--------|---------------------------------------------------------------------------|
|   |                                                                      |
|   | /s/ David Spiegel                                                         |   |
|   | David Spiegel                                                             |
|   | Treasurer (principal financial officer  and principal accounting officer) |

 

21

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FORM-10QSBMARCH 31, 2003

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                  |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                             |
| 99.1                |   | Statement Pursuant to Section 906 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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