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

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 

| **ý****  QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE****ACT OF  1934**                                                                                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                |
| **For the  quarterly period ended March 31, 2004**                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| **o****  TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| **For the  transition period from                               to                             ** |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| **Commission file number 000-30656**                                                                                                                                                                                                                                                                                                                                                                |

 

**APOGEE TECHNOLOGY, INC.**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                     |   | **04-3005815**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |

 

**129 MORGAN DRIVE, NORWOOD, MASSACHUSETTS 02062**

(Addressof principal executive offices)

 

**(781) 551-9450**

(Issuer’stelephone number, including area code)

 

**NOT APPLICABLE.**

(Formername, former address and former fiscal year,if changed since last report)

 

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

 

State the number of shares of each of the Issuer’s classes ofcommon equity, as of the latest practicable date:  As of May 7, 2004, there were 11,379,870 shares of Common Stock,$.01 par value per share, outstanding.

 

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

 

 

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**APOGEE TECHNOLOGY, INC.**

 

**INDEXOF INFORMATION CONTAINED IN FORM 10-QSB FOR THE**

**QUARTER ENDED MARCH 31, 2004**

 

 
| **PART I-FINANCIAL INFORMATION**                                                                      |                                                                                                                                              |
|-------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                  |                                                                                                                                              |   |
| Item 1 - Financial  Statements (Unaudited)                                                            |                                                                                                                                              |   |
|                                                                                                  | Condensed  Consolidated Balance Sheets at March 31, 2004 and December 31,  2003.                                                        |   |
|                                                                                                  | Condensed  Consolidated Statements of Operations and Accumulated Deficit for the Three  Months Ended March 31, 2004 and March 31, 2003. |   |
|                                                                                                  | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2004 and March 31, 2003.                         |   |
|                                                                                                  | Notes  to Condensed Consolidated Financial Statements.                                                                                            |   |
|                                                                                                  |                                                                                                                                              |
| Item  2 - Management’s Discussion and Analysis of Financial Condition and Results  of Operations |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |
| Item  3 - Quantitative and Qualitative Disclosures about Market Risk                                  |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Item 4 - Controls and  Procedures                                                                     |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| **PART II - OTHER INFORMATION**                                                                       |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Item  1 - Legal Proceedings                                                                           |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Item 2 - Changes in  Securities and Use of Proceeds                                                   |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Item 3 -  Defaults Upon Senior Securities                                                             |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Item  4 - Submission of Matters to a Vote of Security Holders                                         |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Item  5 - Other Information                                                                           |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Item 6 -  Exhibits and Reports on Form 8-K                                                            |                                                                                                                                              |
|                                                                                                  |                                                                                                                                              |   |
| Signatures                                                                                            |                                                                                                                                              |
|                                                                                                       |                                                                                                                                                   |  |  |

 

2

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                          |   | **MARCH 31,  2004** |          | **DECEMBER 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------------|-----------------------------|--------|
|                                                                                                                                          |   | **(Unaudited)**          |          |                        |   |
| **ASSETS**                                                                                                                                    |   |                     | ** **    |                        |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| **Current assets**                                                                                                                            |   |                     | ** **    |                        |   |
| Cash and cash equivalents                                                                                                                     |   | **$**                    | **1,685,370** | ** **                  | $      | 2,524,209 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $50,000 in 2004 and $45,000 in 2003                                           |   | **3,681,637**            | ** **    | 3,522,406                   |   |
| Inventories                                                                                                                                   |   | **601,446**              | ** **    | 723,944                     |   |
| Prepaid expenses and other current assets                                                                                                     |   | **204,007**              | ** **    | 180,261                     |   |
| Deferred tax asset                                                                                                                            |   | **195,000**              | ** **    | 195,000                     |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| Total current assets                                                                                                                          |   | **6,367,460**            | ** **    | 7,145,820                   |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| **Property and  equipment, net of accumulated depreciation of $410,012 in 2004 and $391,463  in 2003**                                        |   | **117,929**              | ** **    | 128,831                     |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| **Other assets**                                                                                                                              |   |                     | ** **    |                        |   |
| Digital amplifier patents, net of  accumulated amortization of $108,427 in 2004 and $103,856 in 2003                                          |   | **98,280**               | ** **    | 87,369                      |   |
| Other intangible assets                                                                                                                       |   | **62,167**               | ** **    | 36,667                      |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
|                                                                                                                                          |   | **$**                    | **6,645,836** |                        | $      | 7,398,687 |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                |   |                     | ** **    |                        |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| **Current liabilities**                                                                                                                       |   |                     | ** **    |                        |   |
| Accounts payable and accrued expenses                                                                                                         |   | **$**                    | **1,009,767** | ** **                  | $      | 1,528,590 |   |
| Current maturities of capital lease  obligations                                                                                              |   | **1,679**                | ** **    | 3,318                       |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| Total current liabilities                                                                                                                     |   | **1,011,446**            | ** **    | 1,531,908                   |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| **Stockholders’  equity**                                                                                                                |   |                     | ** **    |                        |   |
| Common stock, $.01 par value; 20,000,000  shares authorized, 11,348,610 and 11,327,270 issued and outstanding in 2004  and 2003, respectively |   | **113,486**              | ** **    | 113,272                     |   |
| Additional paid-in capital                                                                                                                    |   | **16,252,099**           | ** **    | 16,171,611                  |   |
| Accumulated deficit                                                                                                                           |   | **(10,731,195**          | **)**         | (10,418,104                 | )      |
|                                                                                                                                          |   |                     | ** **    |                        |   |
| Total stockholders’ equity                                                                                                               |   | **5,634,390**            | ** **    | 5,866,779                   |   |
|                                                                                                                                          |   |                     | ** **    |                        |   |
|                                                                                                                                          |   | **$**                    | **6,645,836** |                        | $      | 7,398,687 |   |

 

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

 

3

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT

 
|                                                                |   | **THREE  MONTHS ENDED  MARCH 31,** |            |
|---------------------------------------------------------------------|--------|-----------------------------------------|-----------------|
|                                                                |   | **2004**                                |            | **2003** |   |
| **Revenues**                                                        |   |                                    | ** **      |   |   |
| Product sales                                                       |   | **$**                                   | **1,696,691**   | ** ** | $ | 1,519,593 |   |
| Royalties                                                           |   | **375,148**                             | ** **      | 319,999 |   |
| Consulting                                                          |   | **254,484**                             | ** **      | — |   |
|                                                                |   |                                    | ** **      |   |   |
|                                                                |   | **2,326,323**                           |            | 1,839,592 |   |
|                                                                |   |                                    | ** **      |   |   |
| **Costs and expenses**                                              |   |                                    | ** **      |   |   |
| Product sales                                                       |   | **1,114,354**                           | ** **      | 1,068,244 |   |
| Research and development                                            |   | **711,469**                             | ** **      | 356,480 |   |
| Selling, general and administrative                                 |   | **818,841**                             | ** **      | 556,879 |   |
|                                                                |   |                                    | ** **      |   |   |
|                                                                |   | **2,644,664**                           |            | 1,981,603 |   |
|                                                                |   |                                    | ** **      |   |   |
| **Operating loss**                                                  |   | **(318,341**                            | **)**           | (142,011 | ) |
|                                                                |   |                                    | ** **      |   |   |
| **Other (expense)  income**                                         |   |                                    | ** **      |   |   |
| Interest expense                                                    |   | **(65**                                 | **)**           | (499 | ) |
| Interest income                                                     |   | **5,315**                               | ** **      | 3,173 |   |
|                                                                |   |                                    | ** **      |   |   |
|                                                                |   | **5,250**                               |            | 2,674 |   |
|                                                                |   |                                    | ** **      |   |   |
| **Net loss**                                                        |   | **(313,091**                            | **)**           | (139,337 | ) |
|                                                                |   |                                    | ** **      |   |   |
| Accumulated deficit - beginning                                     |   | **(10,418,104**                         | **)**           | (11,174,677 | ) |
|                                                                |   |                                    | ** **      |   |   |
| **Accumulated deficit  - ending**                                   |   | **$**                                   | **(10,731,195** | **)** | $ | (11,314,014 | ) |
|                                                                |   |                                    | ** **      |   |   |
| **Basic and diluted  loss per common share**                        |   | **$**                                   | **(0.03**       | **)** | $ | (0.01 | ) |
|                                                                |   |                                    | ** **      |   |   |
| **Weighted average  common shares outstanding - basic and diluted** |   | **11,337,781**                          | ** **      | 10,749,970 |   |

 

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

 

4

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                           |   | **THREE  MONTHS ENDED  MARCH 31,** |          |
|--------------------------------------------------------------------------------|--------|-----------------------------------------|---------------|
|                                                                           |   | **2004**                                |          | **2003** |   |
| **Cash flows from  operations**                                                |   |                                    | ** **    |   |   |
| Net loss                                                                       |   | **$**                                   | **(313,091**  | **)** | $ | (139,337 | ) |
| *Adjustments to  reconcile net loss to net cash used in operating activities:* |   |                                    | ** **    |   |   |
| Provision for doubtful accounts                                                |   | **5,000**                               | ** **    | 5,000 |   |
| Depreciation and amortization                                                  |   | **23,120**                              | ** **    | 22,510 |   |
| *Changes in  operating assets and liabilities:*                                |   |                                    | ** **    |   |   |
| Accounts receivable                                                            |   | **(164,231**                            | **)**         | (442,187 | ) |
| Inventories                                                                    |   | **122,498**                             | ** **    | (81,117 | ) |
| Prepaid expenses and other current assets                                      |   | **(23,746**                             | **)**         | (1,071 | ) |
| Accounts payable and accrued expenses                                          |   | **(518,823**                            | **)**         | 236,841 |   |
|                                                                           |   |                                    | ** **    |   |   |
| Net cash used in operating activities                                          |   | **(869,273**                            | **)**         | (399,361 | ) |
|                                                                           |   |                                    | ** **    |   |   |
| **Cash flows from  investing activities**                                      |   |                                    | ** **    |   |   |
| Purchases of property and equipment                                            |   | **(7,647**                              | **)**         | (13,564 | ) |
| Patent costs                                                                   |   | **(15,482**                             | **)**         | (3,153 | ) |
| Other intangible assets                                                        |   | **(25,500**                             | **)**         | — |   |
|                                                                           |   |                                    | ** **    |   |   |
| Net cash used in investing activities                                          |   | **(48,629**                             | **)**         | (16,717 | ) |
|                                                                           |   |                                    | ** **    |   |   |
| **Cash flows from  financing activities**                                      |   |                                    | ** **    |   |   |
| Proceeds from issuances of common stock                                        |   | **80,702**                              | ** **    | 40,000 |   |
| Repayment of capital lease obligations                                         |   | **(1,639**                              | **)**         | (4,877 | ) |
|                                                                           |   |                                    | ** **    |   |   |
| Net cash provided by financing activities                                      |   | **79,063**                              | ** **    | 35,123 |   |
|                                                                           |   |                                    | ** **    |   |   |
| **Decrease in cash  and cash equivalents**                                     |   | **(838,839**                            | **)**         | (380,955 | ) |
|                                                                           |   |                                    | ** **    |   |   |
| Cash and cash equivalents - beginning                                          |   | **2,524,209**                           | ** **    | 994,296 |   |
|                                                                           |   |                                    | ** **    |   |   |
| **Cash and cash  equivalents - ending**                                        |   | **$**                                   | **1,685,370** | ** ** | $ | 613,341 |   |

 

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

 

5

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. MARCH 31, 2004 AND 2003.

 

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

 

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

 

The balance sheet at December 31, 2003has been derived from the audited financial statements at that date but doesnot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.

 

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

 

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

 

**2.****                                     ****Pro-forma Information -Stock Options**

 

**TheCompany has adopted only the disclosure provisions of Financial AccountingStandard No. 123, “Accounting For Stock-Based Compensation” (FAS 123).  It applies APB Opinion No. 25, “Accounting**            For StockIssued To Employees”, and related interpretations in accounting for its planand does not recognize compensation expense for its stock-based compensationplan other than for certain options granted in 2001.

** **

**Thefollowing tables illustrate the effect on net loss and loss per share if theCompany had applied the fair value recognition provisions of FAS 123 tostock-based employee compensation.  Theloss per share information shown below has not been adjusted for the stocksplit referred to in Note 4.**

 
|                                                                                                                                                       |   | **Three  Months Ended  March 31,** |           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|----------------|
|                                                                                                                                                       |   | **2004**                                |           | **2003** |   |
|                                                                                                                                                       |   |                                    | ** **     |   |   |
| Net loss, as reported                                                                                                                                      |   | **$**                                   | **(313,091**   | **)** | $ | (139,337 | ) |
|                                                                                                                                                       |   |                                    | ** **     |   |   |
| Deduct:      Total stock-based employee compensation expense  determined under fair value based method for all awards  ***** |   | **(689,532**                            | **)**          | (396,215 | ) |
|                                                                                                                                                       |   |                                    | ** **     |   |   |
| Pro-forma net loss  ******                                                                                                                            |   | **$**                                   | **(1,002,623** | **)** | $ | (535,552 | ) |

 

6

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| Loss per share:                |   |   |      |   |   |
|--------------------------------|--------|--------|-----------|--------|--------|
|                           |   |   |      |   |   |
| As reported, basic and diluted |   | **$**  | **(0.03** | )      | $      | (0.01 | ) |
|                           |   |   |      |   |   |
| Pro-forma, basic and diluted   |   | **$**  | **(0.09** | )      | $      | (0.05 | ) |

 

----

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

 

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

 

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

 

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

 
|           |   | **March 31,  2004** |        | **December 31,  2003** |   |
|----------------|--------|--------------------------|-------------|-----------------------------|--------|
|           |   | **(Unaudited)**          |        |                        |   |
|           |   |                     |        |                        |   |
| Raw materials  |   | **$**                    | **24,688**  |                        | $      | 31,528 |   |
| Finished goods |   | **576,758**              |        | 692,416                     |   |
|           |   |                     |        |                        |   |
|           |   | **$**                    | **601,446** |                        | $      | 723,944 |   |

 

**4.****                                     ****Stockholders’ Equity**

 

***Stock*****Options**

 

**Duringthe three months ended**March 31, 2004, the Board of Directors awarded to certain directors and employeesoptions to purchase 477,500 shares at exercise prices ranging from $8.65 to$9.46 per share.  These options weregranted under the 1997 Employee, Director and Consultant Stock OptionPlan.  The options vest over five yearsbeginning at the first anniversary of the date of grant.

** **

***Other stock issuances***

** **

During the first quarter of 2004, 21,340shares of common stock were issued as a result of exercised stock options atexercise prices ranging from $1.25 to $6.425 per share.  Proceeds from the exercise of optionsamounted to $80,702.

 

7

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**Stock****split**

 

**OnAugust 12, 2003, the Board of Directors authorized a 2-for-1 split of theCompany’s common stock effected in the form of a 100% stock dividend.  The stock dividend was paid onDecember 11, 2003 to stockholders of record at the close of business onNovember 17, 2003.  No fractionalshares of common stock were issued in connection with the stock split.  Par value was not changed and additionalpaid-in capital was charged for the par value of the shares issued.**

** **

**Allreferences to the number of common shares and per-share amounts included in theaccompanying condensed consolidated financial statements for March 31,2004 and 2003 have been adjusted to reflect the stock split.**

** **

**5****.****                                     ****License Agreement**

 

**OnFebruary 7, 2001, the Company signed an exclusive license agreement withST Microelectronics NV (“ST”) of the Netherlands.  The agreement calls for ST to use certain intellectual propertyrights owned or controlled by the Company to commercialize and sell relatedproducts utilizing such technology.  Inconsideration for this license, ST paid to the Company a one-time license feeof $1.6 million in cash and a $400,000 credit for future design services.  The Company will also receive royaltiesbased on certain formulas, as defined in the agreement.  This agreement has no expiration date;however, either party may cancel the agreement upon certain advance notices asdefined in the agreement.  The $400,000credit portion of the license fee is associated with future developmentactivities of the Company.  When the$400,000 amount is recognized in income, it will simultaneously be charged toresearch and development costs.**

** **

**In prioryears, the Company recognized $220,000 of the credit for future designservices.  During the quarter ended**March 31, 2004 the Company recognizedthe remaining $180,000 of income and research and development costs.

** **

**6.****                                     ****Concentrations**

 

**Duringthe three months ended March 31, 2004, the Company derived approximately87% of its total revenue and product revenue from three customers.**

** **

**Duringthe three months ended**March 31, 2003, the Company derived approximately 84% of its total revenue and 92% ofits product revenue from three customers, respectively.

** **

**Three ofthe Company’s major customers accounted for approximately 56% of the totalaccounts receivable balance at March 31, 2004.**

** **

Fiveof the Company’s major customers accounted for approximately 98% of the totalaccountsreceivablebalance at March 31, 2003.

 

8

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**Duringthe three months ended March 31, 2004, 74% of the total revenue wasderived from customers in Asia and 24% of total revenue was derived fromcustomers in Europe.  In addition, 100%of the Company's product revenues were derived from customers in Asia.**

** **

Duringthe three months ended March 31,2003, 82% of the total revenue wasderived from customers in Asia and 99% of the Company’s product sales werederived from customers in Asia.

 

**One ofthe Company’s major vendors accounted for approximately 95% of total purchasesfor the three months ended March 31, 2004.**

** **

Two of the Company’s major vendors accounted for approximately 98% oftotal purchases for the three months ended March 31, 2003.

 

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

** **

**9**

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** **

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

 

**GENERAL**

** **

The following Management’sDiscussion and Analysis of the Company’s Financial Condition and Results ofOperations for the three-month periods ended March 31, 2004 andMarch 31, 2003 should be read in conjunction with the Company’s FinancialStatements and related Notes included elsewhere in this Quarterly Report on Form10-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 “CertainRisk Factors 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, 2003. The Company does notintend to update any such forward-looking statements.

 

**OVERVIEW**

** **

The Companydesigns, develops and markets semiconductor products or integrated circuits(ICs) incorporating the Company’s patented Direct Digital Amplification (DDX®)technology. DDX-based IC products are used in a range of audio applicationsincluding:  home theater systems,powered speakers, car audio, commercial audio, and PC multi-media. Under a licensingagreement with STMicroelectronics NV (ST), the Company is developing andproviding intellectual property to be used in royalty bearing products producedby ST.  In addition, the Company isworking under a development agreement with ST to develop and market newsemiconductor products that leverage Apogee’s DDX technology and ST’sintellectual property and semiconductor design, development and manufacturingcapability. ST is currently shipping 13royalty bearing DDX-based semiconductor products.  The Company generates revenue from the sale ofDDX-based semiconductor chips and related products as well as royalties earnedunder the licensing agreement with ST signed in February 2001.  The Company has developed and ismarketing 14 different DDX-based semiconductor products and has additionalproducts in development.  The Companymarkets its products using a worldwide network of direct sales staff,independent sales representatives and distributors.  TheCompany incurred a net loss of approximately $313,100 for the three monthsended March 31, 2004, as compared to a net loss of $139,300 for the threemonths ended March 31, 2003.  As ofMarch 31, 2004, the Company had an accumulated deficit of approximately$10.7 million, as compared to a deficit of approximately $10.4 million atDecember 31, 2003. Of this accumulated deficit, approximately $4 millionwas attributable to the Company’s now defunct loudspeaker business, which wasdiscontinued in 1994. The Company’s net losses and accumulated deficit (since 1995)result primarily from research costs associated with the Company’s efforts todevelop and market its DDX technology. The Company employed 33 people as of March 31, 2004 andDecember 31, 2003.

 

During the three-monthperiod ended March 31, 2004, the Company derived approximately 87% of itstotal revenue and product revenue from four customers and three customers,respectively.                       The Company utilizes a network of salesrepresentatives and distributors, as well as a sales office in Hong Kong, tosupport the Company’s worldwide sales and marketing activities.                       In April 2004, the Company furtherexpanded its sales organization with the addition of a Country Manager forJapan.

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following selected financial data for the three-monthperiod ended March 31, 2004 and March 31, 2003 have been derived fromthe Company’s financial statements.  Anytrends reflected by the following table may not be indicative of futureresults.

 

|                                             |   | **For the  Three Months ended  March 31,** |       |
|--------------------------------------------------|--------|-------------------------------------------------|------------|
|                                             |   | **2004**                                        |       | **2003** |   |
| Statement of Operations Data:                    |   |                                            | ** ** |   | ** ** |
| Revenue                                          |   | $                                               | 2,326,323  |   | $ | 1,839,592 |   |
| Costs and expenses                               |   | 2,644,664                                       |       | 1,981,603 |   |
| Other income (expense)                           |   | 5,250                                           |       | 2,674 |   |
| Net Profit (Loss)                                |   | $                                               | (313,091   | ) | $ | (139,337 | ) |
|                                             |   |                                            |       |   |   |
| Shares Outstanding                               |   | 11,348,610                                      |       | 10,763,170 |   |
|                                             |   |                                            |       |   |   |
| Balance Sheet Data:                              |   |                                            |       |   |   |
| Total Assets                                     |   | $                                               | 6,645,836  |   | $ | 3,631,477 |   |
| Stockholders’ equity                        |   | $                                               | 5,634,390  |   | $ | 2,379,619 |   |
| Profit (Loss) per share(basic and fully diluted) |   | $                                               | (0.03      | ) | $ | (0.03 | ) |

 

10

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**RESULTS OFCONTINUING OPERATIONS OF THE COMPANY**

 

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

 

|                              |   | **For the  Three Months Ended  March 31,** |   |
|-----------------------------------|--------|-------------------------------------------------|--------|
|                              |   | **2004**                                        |   | **2003** |   |
|                              |   |                                            |   |   |   |
| Product Sales                     |   | 72.93                                           | %      | 82.60 | % |
| Royalties                         |   | 16.13                                           |   | 17.40 |   |
| Consulting                        |   | 10.94                                           |   | 0.00 |   |
|                              |   |                                            |   |   |   |
| Cost of Sales                     |   | 47.86                                           |   | 58.07 |   |
| Research and Development          |   | 30.62                                           |   | 19.38 |   |
| Sales, General and Administrative |   | 35.20                                           |   | 30.27 |   |
|                              |   |                                            |   |   |   |
| Operating Loss                    |   | (13.68                                          | )%     | (7.72 | )% |
| Other Income (Expense)            |   | 0.23                                            |   | 0.15 |   |
| Net Loss                          |   | (13.45                                          | )%     | (7.57 | )% |

 

Three Months EndedMarch 31, 2004 compared with Three Months Ended March 31, 2003.

 

Revenue

 

**The Company derives its revenue from three sources: (1)product sales, which consist of merchandise sales made either directly tomanufacturers or to distributors, (2) royalty revenue, which consists ofroyalties paid by STMicroelectronics under the terms of the licensing agreementsigned in February 2001 and (3) consulting income related to thedevelopment of custom ICs for STMicroelectronics and other third parties whoare developing DDX and non DDX based solutions.**

** **

Total revenue increased by approximately 26.5% or $486,700 to$2.3 million for the three months ended March 31, 2004 from $1.8 millionfor the three months ended March 31, 2003.

 

Revenue from the sale of the Company’s products, consistingof semiconductor IC’s, as well as DDX evaluation and reference boards,increased by approximately 11.7% or $177,000 to approximately $1.7 million forthe three months ended March 31, 2004 from $1.5 million for the threemonths ended March 31, 2003. This increase in product revenue wasprimarily due to growth in sales of the Company’s semiconductor products.

 

Revenue from non-product related items accounted forapproximately 27% of total revenue for the three months ended March 31,2004, compared to revenue from non-product related items of approximately 17%for the three months ended March 31, 2003.  During the three months ended March 31, 2004, the Companyrecorded net royalty payments under the ST agreement of approximately $375,100,compared to royalty payments of $320,000 for the three months endedMarch 31, 2003.  This represents ayear-to-year increase of approximately 17%. In addition, during the firstquarter ended March 31, 2004, the Company recorded consulting revenue ofapproximately $254,500, including approximately $180,000 of consulting revenuefrom design services performed by ST as part of a $400,000 design credit inaccordance with terms of the Licensing Agreement with ST. No consulting revenuewas recognized during the same period in 2003.

 

Total Revenue for the Three Months Ended March 31, 2004 and 2003consisted of:

 

 
|            |   | **2004** |      | **2003** |   |
|-----------------|--------|----------|-----------|----------|--------|
|            |   |     |      |     |   |
| Product Revenue |   | $        | 1,696,691 |     | $      | 1,519,593 |   |
| Royalties       |   | 375,148  |      | 319,999  |   |
| Consulting      |   | 254,484  |      | -0-      |   |
|            |   |     |      |     |   |
| Total:          |   | $        | 2,326,323 |     | $      | 1,939.592 |   |

 

Cost of Revenue

 

**Cost of revenue remained constant at $1.1 million for boththe three months ended March 31, 2004 and March 31, 2003.  Cost of revenue includes cost of purchasingfinished semiconductor chips as well as customs and storage fees.**

 

11

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**For the three months ended March 31, 2004, the Companyrecorded a gross margin from product sales of approximately 34% compared to agross margin from product sales of 30% for the three months endedMarch 31, 2003.  The increase inthe gross margin for the three months ended March 31, 2004 reflects salesof higher margin products.  The Companyanticipates that the cost of product sales will continue to increase in dollaramounts as the Company continues increasing its product sales, but to declineas a percentage of revenue.**

** **

Research and Development(“R&D”) Expenses

 

Research anddevelopment expenses consist primarily of salaries and related expenses in thedesign, development and technical support of the Company’s products as well asdirect support to current and potential customers in the development ofconsumer products utilizing DDX semiconductor products.  Research and development expenses forthe three months ended March 31, 2004 were approximately $712,400, anincrease of $355,900 or 99.8% from $356,500 for the three months endedMarch 31, 2003.  Of this increaseapproximately $180,000 was incurred as a result of the final utilization of a$400,000 design credit from ST, offsetting $180,000 of consulting revenuerecognized during the first quarter ended March 31, 2004.  Additional increases were primarily due toincreased human resource costs, as well as an increase in depreciation andamortization expense.  Costs related tohuman resources for R & D increased to approximately $466,700 for the threemonths ended March 31, 2004 from $329,800 for the three months endedMarch 31, 2003, an increase of approximately $136,900 or 41.5%.  During the three months ended March 31,2004, the Company’s research and development team consisted of 20 engineers andtechnical support staff compared to 16 for the same period in 2003.  Depreciation and amortization expenseincreased to approximately $42,800, an increase of $30,200 for the three monthsended March 31, 2004 from $12,600 for the same period in 2003.  This increase was primarily due to theacquisition of equipment and software required for future chip design.  During the three months ended March 31,2004 the Company completed and introduced four new semiconductor products, theDDX-8229 Controller and the DDX-1050, DDX-1060 and DDX-1080 Power Devices.  The Company continues to invest in thedevelopment of its next generation IC’s, as well as, the continuation ofsupport to both existing and potential customers.  Due to the technical nature of the Company’s products,engineering and design support are critical parts of the Company’s strategyduring both the development of its products and the support to its customersfrom product design to final production. Management anticipates that it will continue to commit resources toresearch, development and design activities. It expects these expenses to increase, but to decline as a percentage ofrevenue as revenue increases.

 

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

 

Selling expenses consist primarily of salaries and relatedexpenses for personnel engaged in the marketing and sales of the Company’sproducts, as well as costs related to trade shows, product literature, traveland other promotional support costs. In addition, selling expenses includecosts of its Hong Kong sales office. General and administrative costs consist primarily of executive andadministrative salaries, professional fees and other associated corporateexpenses. The increase in SG & A, described below, was attributableprincipally to support for the Company’s Hong Kong Office, increased humanresource costs, increased commissions and royalties paid to third partyrepresentatives on increased revenue and an increase in professional fees.  SG&A expenses were approximately$818,800 for the three months ended March 31, 2004, compared toapproximately $556,900 for the three months ended March 31, 2003, anincrease of approximately $261,900 or 28.1%. Human resource costs increased approximately $71,000 or 28% toapproximately $324,500 for the three months ended March 31, 2004, comparedto $253,500 during the same period in 2003. This increase was primarily due to higher compensation, as well as, anincrease in staffing both domestically and in the Hong Kong office.  At March 31, 2004 the Hong Kong officeemployed six people up from five employees at March 31, 2003.  In November 2003, the Company hired aDirector of Marketing; increasing the SG & A staff domestically to sixemployees for the three months ended March 31, 2004 up from five employeesat March 31, 2003.  Commissions androyalty expense on sales increased approximately $175,700 to $176,300 for thethree months ended March 31, 2004, compared to $600 for the same period in2003.  As the Company expands its salespresence with additional sales representatives worldwide, this number isexpected to continue to increase.  Professionalexpenses increased approximately $12,000 or 15.6% to $89,300 for the threemonths ended March 31, 2004 compared to $77,300 for the same period in2003 primarily due to the addition of a sales consultant in Japan and increasedcosts for the sales associate 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.

 

Interest Income (Expense)

 

Interest income, net of expense, includes income from theCompany’s cash and cash equivalents and from investments and expenses relatedto its financing activities.  During thethree months ended March 31, 2004, the Company generated net interestincome of approximately $5,300 compared to net interest income of approximately$2,700 during the same period in 2003. This increase in net interest income for the three months endedMarch 31, 2004 was primarily due to interest on increased cash as ofDecember 31, 2003 and reduced interest due on leased equipment.

 

Net Profit (Loss)

 

The Company’s net loss forthe three months ended March 31, 2004 was approximately $313,100 or $.03per basic and diluted common share, compared to a loss of approximately$139,300 or $.03 per basic and diluted common share for the three months endedMarch 31, 2003.

 

12

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**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s principalsource of liquidity at March 31, 2004 consisted of approximately $1.7million in cash and short-term investments and no debt.  This compares to approximately $2.5 millionin cash and cash equivalents at December 31, 2003.  This decrease in cash was due to reducingthe Company’s accounts payables and accrued expenses, working capital requirementsand financing of the Company’s accounts receivable.

 

Net cash used in operationsduring the three-month period ended March 31, 2004 increased toapproximately $869,300 compared to approximately $399,400 in the three-monthperiod ended March 31, 2003.  As ofMarch 31, 2004, inventory was approximately $601,400 compared to inventoryof approximately $219,800 as of March 31, 2003.  Net accounts receivable was approximately $3.8 million atMarch 31, 2004, up from approximately $2.5 million at March 31, 2003.  This increase in accounts receivable was dueto increased shipments of the Company’s semiconductor products as well asincreased royalties due under the STMicroelectronics License Agreement.  As of March 31, 2004, three majorcustomers accounted for approximately 56% of the total accounts receivablebalance. The Company increased its reserve against bad debts to $50,000 as ofMarch 31, 2004 from $45,000 as of December 31, 2003.  The Company believes this reserve issufficient at this time as a percentage of the Company’s receivables aresecured by letters of credit.

 

Net cash used in investingactivities for the three months ended March 31, 2004 was approximately$48,600, compared to approximately $16,700 for the three months endedMarch 31, 2003.

 

Net cash provided byfinancing activities for the three months ended March 31, 2004 wasapproximately $79,100, compared to $35,100 provided by financing activities forthe three months ended March 31, 2003. During the three-month period ended March 31, 2004, the Companyreceived $80,702 net in cash from the exercise of options by eightemployees.  The Company believes thatcash flow from operations and amounts that may be raised from time to time inprivate offerings of its common stock will be sufficient to support operationsand fund capital equipment requirements over the next twelve months.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of the consolidated financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities and expenses.  On anon-going basis, the Company evaluates its estimates, including those related touncollectible accounts receivable, inventories, intangibles and 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.

 

The Company believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financialstatements.  The Company maintainsallowances for uncollectible accounts receivable for estimated losses resultingfrom the inability of its customers to make required payments.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. The Company maintainsallowances for estimated excess or obsolete inventories based on the Company’sreview of inventory levels, projected future sales and comparison of actualmanufacturing costs to standard costs. If actual market conditions are less favorable than those projected bymanagement, additional allowances may be required. Property, plant andequipment, patents, trademarks and other intangible assets are amortized overtheir estimated useful lives.  Usefullives are based on management’s estimates over the period that such assets willgenerate revenue. Intangible assets are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying value of an asset maynot be recoverable. Future adverse changes in market conditions or pooroperating results of underlying capital investments or intangible assets couldresult in losses or an inability to recover the carrying value of such assets,thereby possibly requiring an impairment charge in the future.

 

TheCompany prepares its consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America.  The preparation of these financialstatements requires us to make estimates, judgments and assumptions that webelieve are reasonable based upon the information currently available.  These estimates and assumptions affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the periodspresented.  Any future changes to theseestimates and assumptions could have a significant impact on the reportedamounts of revenue, expenses, assets and liabilities in our financialstatements.  The significant accountingpolicies which we believe are the most critical to aid in fully understandingand evaluating our reported financial results include the following:

 

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RevenueRecognition

 

Apogeerecognizes revenue from product sales at the time of shipment, when the salesprice is fixed and determinable and collectibility is reasonably assured.  The Company does not offer a right of returnon product sales.  Any price adjustmentafter shipment of goods is recorded as an offset to revenue.  For sales transactions, we comply with theprovisions of Staff Accounting Bulletin 104, Revenue Recognition, which statesthat revenue should be recognized when the following revenue recognitioncriteria are met:  (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped and thecustomer takes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured.                         In addition, the Company records royaltyrevenue when earned in accordance with the underlying agreements.  Consulting revenue is recognized as servicesare performed.

 

AccountsReceivable

 

TheCompany performs credit evaluations of customers and determines credit limitsbased upon payment history, customers’ creditworthiness and other factors, asdetermined by our review of their current credit information.  For a majority of our larger sales, we canrequire the issuance of a Letter of Credit. Smaller accounts must either pay via credit card or in advance ofshipment.  We continuously monitor collectionsand payments from our customers, and we maintain a provision for estimatedcredit losses based upon our historical experience and any specific customercollection issues that we have identified. While we have not had any significant credit losses to date, we cannotguarantee that we will continue to avoid credit losses in the future.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.  Since our accounts receivable are highly concentrated in a small numberof customers, a significant change in the liquidity or financial position ofany one of these customers could have a material adverse impact on thecollectibility of our accounts receivable, our liquidity or our future resultsof operations.

 

Inventory

 

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

 

Valuationof Long-Lived Assets

 

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

 

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

** **

There are a number of importantfactors that could cause our actual results to differ materially from thoseindicated or implied by forward-looking statements. Factors that could cause orcontribute to such differences include those discussed below, as well as thosediscussed elsewhere in this Form 10-QSB. We disclaim any intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise except as may be requiredby law.

 

**RISKS RELATED TO OUR BUSINESS**

 

**WEHAVE HAD A HISTORY OF LOSSES AND MAY NOT BE ABLE TO SUSTAIN PROFITABILITY.**

** **

As of March 312004, we had an accumulated deficit of approximately $10.7 million. Of thisamount, approximately $4 million was generated by the Company’s formerloudspeaker subsidiary, Apogee Acoustics, Inc., which discontinued operationsin 1994.  We recorded a loss ofapproximately $313,100 for the three-month period ended March 31,2004.  The Company recorded a net profitof approximately $756,600 for the year ended December 31, 2003, but netlosses of $1,065,300 in 2002, $895,000 in 2001, $1.9 million in 2000 and $1.1million in 1999.  We will need togenerate revenue to sustain year-to-year profitability and positive cashflow.  Our ability to generate futurerevenue and sustain profitability will depend on a number of factors, many ofwhich are described throughout this risk factor section.  If we are unable to maintain profitability,our share price would likely decline.

 

**THE COMPANY HASONLY A SMALL NUMBER OF CUSTOMERS, AND THE LOSS OF THESE CUSTOMERS WOULD HAVE AMATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

During the three months endedMarch 31, 2004, the Company derived approximately 87% of its total revenueand product revenue were from three customers and four customers,respectively.  The loss of any of theCompany’s customers would have a material adverse effect on its business,financial condition and results of operations. The Company intends to diversify its customer base in the 

 

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coming months in order toreduce its dependence on a small number of customers.  The Company may not be able to succeed in these efforts.

 

**OUR BUSINESS ISCONCENTRATED IN A LIMITED NUMBER OF MARKETS AND ANY SIGNIFICANT CHANGE IN THESEMARKETS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

Approximately 74% and 24% ofthe Company’s total revenue for the three months ended March 31, 2004 wereto customers in Asia and Europe, respectively. In addition, 100% of product revenue was from customers in Asia.  A significant percentage of the Company’sproduct revenue is to manufacturers producing DVD Receivers.  This is a relatively new consumer electronicproduct with a limited sales history. The Company intends to develop new markets in order to diversify themarket applications of its products.

 

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

 

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

 

•  identify emerging technological trendsin our market

 

•  identify changing consumerrequirements

 

•  develop or maintain competitivetechnology, including new product offerings

 

• improve the performance, features and reliability of our products,particularly in response to technological change and competitive offerings

 

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

 

•  protect our intellectual property.

 

We may not succeed in developing andmarketing new products that respond to technological and competitivedevelopments and changing customer needs, or and such products may not gainmarket acceptance and be incorporated into the technology or products of thirdparties.  Any significant delay orfailure to develop new enhanced technologies, including new product offerings,and any failure of the marketplace to accept any new technology and productofferings would have a material adverse effect on our business, financialcondition and results of operations.

 

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

 

We have frequently incurred netlosses from operations and may continue to do so in the future. We have fundedour operating activities to date primarily from the sale of securities.  We will likely require additional capital inthe future, which may be in the form of additional sales of securities.  The additional capital may not be readilyavailable to us on favorable terms, if at all. Any sale of securities would result in dilution to our currentstockholders’ ownership in the Company.

 

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

 

Part of our business strategyis to expand our licensing activities with STMicroelectronics and to enter intolicensing relationships with other companies in order to offer products to alarger customer base than could be reached through our own development andmarketing efforts.  We believe that suchrelationships can accelerate market penetration of our products andtechnologies, while limiting our manufacturing exposure and sales and marketingcosts.  However, we may not be able toexpand or maintain our existing licensing relationships or establish newlicensing relationships on commercially reasonable terms, if at all.  Any future inability by us to maintain ourlicensing relationships or to enter into additional licensing relationships, orthe failure of one or more of our licensing relationships to contribute to thedevelopment and maintenance of a market for our products, could have a materialadverse effect on our business, operating results and financial condition.

 

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**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

** **

We have experiencedfluctuations in our quarterly operating results in the past and it is likelythat these fluctuations will continue in the future.  These fluctuations are caused by many factors, including, but notlimited to:

 

•  availability and pricing from our suppliers;

 

•  changes in the demand for our products bycustomers;

 

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

 

•  rate and success of new customer development;

 

•  changes in our pricing policies or those of ourcompetitors;

 

•  success in attracting, retaining and motivatingqualified personnel; and

 

•  changes in general economic conditions.

 

A substantial portion of ouroperating expenses is related to personnel, facilities, and sales and marketingprograms and are fixed.  Our expenselevel is based in part on our expectations of future orders and sales, whichare extremely difficult to predict. Accordingly, we may not be able to adjust our fixed expenses quicklyenough to address any significant shortfall in demand for our products inrelation to our expectations.

 

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

 

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

 

We may not be successful inrecruiting and retaining executive officers and other key management andtechnical personnel.  The competitionfor employees with the necessary high level of technical expertise to designand market our products is intense, particularly in eastern Massachusetts.  We will need to hire a number of additionaltechnical personnel if we are to increase the rate at which we develop newproducts.  Because competition forhighly skilled technical personnel is so intense, companies in Apogee’sindustry are subject from time to time to complaints brought by competitors alleginginterference with contractual relations or wrongful hiring of employees.  Such lawsuits may be costly, may divertmanagement attention and resources from the operation of our business, and maytherefore adversely affect our financial condition and results ofoperations.  In addition, the loss ofthe management and technical expertise of our senior management could seriouslyharm us.  The Company does not have inplace employment contracts for some members of its senior management, includingthe COO and Vice President of Engineering.

 

**WE DO NOT HAVE MANUFACTURING CAPABILITIES,AND AS A RESULT, WE RELY ON OUTSIDE FOUNDRIES TO MANUFACTURE OUR SEMICONDUCTORPRODUCTS.**

** **

We have no manufacturingcapabilities, nor do we have plans to establish any such capabilities.  Accordingly, we utilize outsidesemiconductor foundries, assembly and test companies to manufacture oursemiconductor products.  There aresignificant risks associated with our reliance on these foundries that canadversely affect our business, operating results and financial condition.  These risks include:

 

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

 

•     delaysin production or shortages in product delivery as a result of productionproblems at outside contractors

 

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

 

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

 

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

 

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

 

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

 

Our products are based onrecently developed technology and are manufactured using state-of-the-artmanufacturing processes.  Our approachto product qualification and testing may not fully evaluate or identify productcharacteristics or defects that could adversely affect the product’s ability tooperate in the intended application.  Ifsuch defects or characteristics are discovered after installation, productrevenue might be significantly delayed and our ability to maintain existingcustomers and to retain new customers may be seriously affected.

 

**OUR ABILITY TO ACHIEVE REVENUE GROWTH WILL BE HARMED IF WEARE UNABLE TO PERSUADE THE MARKET TO ADOPT OUR AMPLIFIER AND POWER SUPPLYTECHNOLOGIES.**

 

We face challenges inpersuading manufacturers to adopt our products using our DDX amplifiertechnology and our new QRX power supply products.  Traditional amplifiers use design approaches developed in the1930s.  These approaches are still usedin most amplifiers and engineers are familiar with these designapproaches.  In order to adopt ourproducts, manufacturers and engineers must understand and accept our newtechnology.  In addition, our amplifierand power supply technologies may be more expensive for some applications thantraditional amplifier and power supply technologies.  For these reasons, prospective customers may be reluctant toadopt our technology.

 

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

 

The semiconductor and consumeraudio industry is highly competitive, and we expect the intensity of thecompetition to increase. Many of our competitors have greater financial,technical, research, marketing, sales, distribution, service and otherresources than we do.  Moreover, ourcompetitors may offer broader product lines and have greater name recognitionthan we do, and may offer discounts as a competitive tactic.  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 developor market technologies or products that are more effective or more commerciallyattractive than our current or future products, or that may render ourtechnologies or products less competitive or obsolete.  Accordingly, if competitors introducesuperior technologies or products and we cannot make enhancements to ourtechnologies and products necessary for them to remain competitive, ourcompetitive position, and in turn, our business, revenues and financialcondition, will be seriously harmed.

 

**RISKSRELATED TO OUR INTELLECTUAL PROPERTY**

** **

**OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BE INSUFFICIENTTO PROTECT OUR COMPETITIVE POSITION.**

 

Our business depends, in part,on our ability to protect our intellectual property.  We rely primarily on patent, copyright, trademark and tradesecret laws to protect our proprietary technologies.  We cannot be sure that such measures will provide meaningfulprotection for our proprietary technologies and processes.  We have three issued United States patentsand two pending patent applications.  Wecannot 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.

 

We also generally enter intoconfidentiality agreements with our employees and strategic partners, andgenerally control access to and distribution of our documentation and otherproprietary information.  Despite theseprecautions, it may be possible for a third party to copy or otherwise obtainand use our products or technology without authorization, develop similartechnology independently or design around our patents.  In addition, effective copyright, trademarkand trade secret protection may be unavailable or limited in certain foreigncountries.

 

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

 

The semiconductor and consumeraudio industries are characterized by vigorous protection and pursuit ofintellectual property rights. From time to time, we may receive notices ofclaims of infringement, misappropriation or misuse of other parties’proprietary rights. We cannot be sure that we will prevail in these actions, orthat other actions alleging infringement by us of third-party patents,misappropriation or misuse by us of third-party trade secrets or the invalidityof one or more patents held by us will not be asserted or prosecuted againstus, or that any assertions of infringement, misappropriation or misuse orprosecutions seeking to establish the 

 

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invalidity of our patents will not seriously harm our business.  For example, in a patent or trade secretaction, an injunction could be issued against us requiring that we withdrawparticular products from the market or necessitating that specific productsoffered for sale or under development be redesigned.

 

Irrespective of the validity orsuccessful assertion of various claims of infringement, misappropriation ormisuse of other parties’ proprietary rights, we would likely incur significantcosts and diversion of our management and personnel resources with respect tothe defense of such claims, which could seriously harm our business.  If any claims or actions are assertedagainst us, we may seek to obtain a license under a third party’s intellectualproperty rights.  We cannot be sure thatunder such circumstances a license would be available on commerciallyreasonable terms, if at all.  Moreover,we often incorporate the intellectual property of our strategic customers intoour designs, and we have certain obligations with respect to the non-use andnon- disclosure of such intellectual property. We cannot be sure that the steps taken by us to prevent our, or ourcustomers’, misappropriation or infringement of the intellectual property willbe successful.

 

**RISKSRELATING TO OUR COMMON STOCK**

** **

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

 

The stock markets have experiencedextreme price and volume fluctuations that have affected and continue to affectthe market prices of equity securities of many technology companies.  These fluctuations often have been unrelatedor disproportionate to the operating performance of those companies.  We expect that the market price of ourCommon Stock will fluctuate as a result of variations in our quarterlyoperating results, or for other reasons that are not related to the performanceof our business.  These fluctuations maybe exaggerated if the trading volume of our Common Stock is low.  In addition, due to the technology-intensivenature of our business, the market price for our Common Stock may rise and fallin response to various factors including:

 

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

 

•   investor perceptions and expectations regardingour or our competitors’ products;

 

•   acquisitions or strategic alliances by us or ourcompetitors; and

 

•   the gain or loss of a significant customer ororder.

 

In addition, marketfluctuations, as well as general economic, political and market conditions suchas recessions, interest rate changes or international currency fluctuations,may negatively impact the market price of our Common Stock.

 

**BECAUSE A LIMITED NUMBER OF PERSONS, INCLUDING DIRECTORS ANDEXECUTIVE OFFICERS, OWN A SUBSTANTIAL PERCENTAGE OF OUR COMMON STOCK, SUCHPERSONS WILL BE ABLE TO INFLUENCE CORPORATE DECISIONS IN A WAY THAT MAY BEDETRIMENTAL TO OTHER STOCKHOLDERS.**

 

As of March 31, 2004 ourexecutive officers and directors owned approximately forty-two percent (42.15%)of the outstanding shares of Common Stock of the Company.  Accordingly, such persons have sufficientvoting power to substantially influence the outcome of matters that are put toa stockholder vote, including the election of a majority of the board ofdirectors, and any merger, consolidation or sale of all or substantially all ofour assets, and also have control over our management and affairs.  As a result of such voting power, thesestockholders will be able to influence the outcome of corporate actions,including proxy contests, mergers involving us, tender offers, open market purchaseprograms or other purchases of Common Stock that could give our stockholdersthe opportunity to realize a premium over the then prevailing market price fortheir shares of Common Stock.  Thisconcentration of ownership could also adversely affect our stock’s market price**.**

 

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

 

The Company’s financial instruments include: cash, cash equivalents,accounts receivable and accounts payable. At March 31, 2004, the carrying value of the Company’s cash, cashequivalents, accounts receivable and accounts payable approximate fair valuesgiven the short maturity of these instruments.

 

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

 

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

 

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**ITEM4 – CONTROLS AND PROCEDURES**

 

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

 

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

 

**PART II - OTHER INFORMATION**

** **

**ITEM 1 - LEGAL PROCEEDINGS**

 

None.

 

**ITEM 2 - CHANGES IN SECURITIES**

 

During the first quarterended March 31, 2004, 21,340 shares of the Company’s Common Stock wereissued to employees as a result of the exercise of certain options pursuant tothe Company’s 1997 Employee, Director and Consultant Stock Option Plan (the“Plan”).  The exercise price for theseshares ranged from $1.25 per share to $6.425 per share.

 

During the first quarter ended March 31, 2004, theCompany granted options to employees and directors to purchase, in theaggregate, up to 477,500 shares of the Company’s Common Stock at exerciseprices ranging from $8.65 per share to $9.46 per share under the Plan.

 

**ITEM 3 - DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5 - OTHER INFORMATION**

 

None.

 

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

 

(a)                                  Exhibits:

 

See Exhibit Index

 

(b)                                 Reports on Form 8-K:

 

None.

 

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**SIGNATURES**

 

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

 
|               | **APOGEE  TECHNOLOGY, INC.**                                                                                                        |   |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------|--------|
|               |                                                                                                                                |   |
| Date: May 17, 2004 | By:  /s/             Herbert  M. Stein                             |   |
|               | Name:  Herbert M. Stein                                                                                                        |   |
|               |  Title:  Chairman of the Board,                                                                                                |   |
|               |  President,  Chief Executive Officer and Treasurer   (principal financial officer and principal accounting  officer) |   |

 

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FORM-10QSB

MARCH 31, 2004

 

**EXHIBIT INDEX**

 
| **ExhibitNumber** |   | **Description**                                                                                                                                                                                            |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1              |   | Employment Agreement dated March 25, 2004 between Herbert M. Stein and Apogee Technology, Inc.                                                                                                        |
|              |   |                                                                                                                                                                                                       |
| 31.1              |   | Statement  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief  Executive Officer and Principal Financial Officer Regarding Facts and  Circumstances Relating to Exchange Act Filings. |
|              |   |                                                                                                                                                                                                       |
| 32.1              |   | Statement  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief  Executive Officer and Principal Financial Officer Regarding Facts and  Circumstances Relating to Exchange Act Filings. |

 

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