** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20569**

 

**Form 10-Q**

 

**ý****Quarterly Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the QuarterlyPeriod Ended September 30, 2003**

 

**Or**

 

**o****Transition Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the transition period from                                  to                                   **

 

**Commissionfile number      0-23150**

 

| **Ibis Technology Corporation**                                 |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)         |
|                                                            |   |   |   |   |
| **Massachusetts**                                               |   |   |   | **04-2987600** |
| (State or other jurisdiction of  incorporation or organization) |   |   |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |   |   |
|                                                            |   | **32 Cherry Hill Drive, Danvers, MA** |   | **01923** |
|                                                            |   | (Address of principal executive offices) |   | (Zip Code) |
|                                                            |   |   |
| **(978) 777-4247**                                              |
| (Registrant’s telephone number, including  area code)      |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 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

 

10,565,524 shares of Common Stock, par value$.008, were outstanding on October 31, 2003.

 

 

----

 

**IBISTECHNOLOGY CORPORATION**

 

**INDEX**

 
|                                                                                                                                                   | **Page**

**Number** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------|
| PART 1 - FINANCIAL INFORMATION                                                                                                                         |                 |
|                                                                                                                                                   |                 |
| Item 1 – Financial Statements:                                                                                                                    |                 |
|                                                                                                                                                   |                 |
| Balance  Sheets  December 31, 2002 and September 30, 2003 (unaudited)                                                                                  | 3                    |
|                                                                                                                                                   |                 |
| Statements  of Operations  Three Months Ended September 30, 2002 and 2003 and  Nine Months Ended September 30, 2002 and September 30, 2003 (unaudited) | 4                    |
|                                                                                                                                                   |                 |
| Statements  of Cash Flows  Nine Months Ended September 30, 2002 and 2003 (unaudited)                                                                   | 5                    |
|                                                                                                                                                   |                 |
| Notes  to Unaudited Interim Financial Statements                                                                                                       | 6                    |
|                                                                                                                                                   |                 |
| Item  2 – Management’s Discussion and Analysis of Financial Condition and Results  of Operations                                             | 11                   |
|                                                                                                                                                   |                 |
| Item  3 – Quantitative and Qualitative Disclosure About Market Risk                                                                               | 19                   |
|                                                                                                                                                   |                 |
|                                                                                                                                                   |                 |
| PART  II – OTHER INFORMATION                                                                                                                      | 19                   |
|                                                                                                                                                   |                 |
| Item  1 – Legal Proceedings                                                                                                                       | 19                   |
|                                                                                                                                                   |                 |
| Item  2 – Changes in Securities                                                                                                                   | 19                   |
|                                                                                                                                                   |                 |
| Item  3 – Defaults upon Senior Securities                                                                                                         | 19                   |
|                                                                                                                                                   |                 |
| Item  4 – Submission of Matters to a Vote of Security Holders                                                                                     | 19                   |
|                                                                                                                                                   |                 |
| Item  5 – Other Information                                                                                                                       | 19                   |
|                                                                                                                                                   |                 |
| Item  6 – Exhibits and Reports on Form 8-K                                                                                                        | 19                   |
|                                                                                                                                                   |                 |
| Signatures                                                                                                                                             | 20                   |

 

2

----

 

**IBISTECHNOLOGY CORPORATION**

 

**BALANCE SHEETS**

**(Unaudited)**

 
|                                                                                                                                       |                                       | **December  31,  2002** |        | **September  30,  2003** |        |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|-------------------------|-------------|--------------------------|-------------|
|                                                                                                                                       |                                       |                    |        |                     |        |
| **Assets**                                                                                                                                 |                                       |                    |        |                     |        |
| **Current assets:**                                                                                                                        |                                       |                    |        |                     |        |
| Cash and cash equivalents                                                                                                                  |                                       | $                       | 11,745,918  |                     | $           | 4,867,904 |   |
| Accounts receivable, trade, net (note 6)                                                                                                   |                                       | 1,598,560               |        | 203,348                  |        |
| Unbilled revenue (note 6)                                                                                                                  |                                       | —                  |        | 528,581                  |        |
| Inventories (note 3)                                                                                                                       |                                       | 1,231,559               |        | 2,736,239                |        |
| Deferred costs                                                                                                                             |                                       | 2,621,580               |        | —                   |        |
| Prepaid expenses and other current assets                                                                                                  |                                       | 112,729                 |        | 294,532                  |        |
| Total current assets                                                                                                                       |                                       | 17,310,346              |        | 8,630,604                |        |
| Property and equipment                                                                                                                     |                                       | 51,728,659              |        | 51,700,792               |        |
| Less:                                                                                                                                      | Accumulated  depreciation and amortization |                    | (19,233,900 | )                        | (22,127,000 | ) |
|                                                                                                                                       | Net property  and equipment                |                    | 32,494,759  |                     | 29,573,792  |   |
| Patents and other assets, net                                                                                                              |                                       | 1,893,854               |        | 1,737,059                |        |
| Total assets                                                                                                                               |                                       | $                       | 51,698,959  |                     | $           | 39,941,455 |   |
|                                                                                                                                       |                                       |                    |        |                     |        |
| **Liabilities and  Stockholders’ Equity**                                                                                             |                                       |                    | ** **  |                     | ** **  |
| **Current liabilities:**                                                                                                                   |                                       |                    |        |                     |        |
| Capital lease obligation, current                                                                                                          |                                       | $                       | 1,501,415   |                     | $           | 1,495,808 |   |
| Accounts payable                                                                                                                           |                                       | 897,212                 |        | 2,429,020                |        |
| Accrued liabilities                                                                                                                        |                                       | 2,394,601               |        | 2,824,769                |        |
| Deferred revenue                                                                                                                           |                                       | 6,966,325               |        | —                   |        |
| Total current liabilities                                                                                                                  |                                       | 11,759,553              |        | 6,749,597                |        |
| Capital lease obligation, noncurrent                                                                                                       |                                       | 1,184,400               |        | 74,651                   |        |
| Total liabilities                                                                                                                          |                                       | 12,943,953              |        | 6,824,248                |        |
|                                                                                                                                       |                                       |                    |        |                     |        |
| **Stockholders’ equity:**                                                                                                             |                                       |                    |        |                     |        |
| Undesignated preferred stock, $.01 par  value.  Authorized 2,000,000 shares; none issued                                                   |                                       | —                  |        | —                   |        |
| Common stock, $.008 par value.  Authorized 50,000,000 shares; issued 9,474,940 shares and 9,561,774 shares in  2002 and 2003, respectively |                                       | 75,799                  |        | 76,494                   |        |
| Additional paid-in capital                                                                                                                 |                                       | 79,101,032              |        | 79,685,702               |        |
| Accumulated deficit                                                                                                                        |                                       | (40,421,825             | )           | (46,644,989              | )           |
| Total stockholders’ equity                                                                                                            |                                       | 38,755,006              |        | 33,117,207               |        |
| Total liabilities and stockholders’ equity                                                                                            |                                       | $                       | 51,698,959  |                     | $           | 39,941,455 |   |

 

See accompanying notes to unaudited interimfinancial statements.

 

3

----

 

**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
|                                                   |   | **Three  months ended  September 30,** |       | **Nine months  ended  September 30,** |       |
|--------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                   |   | **2002**                               |       | **2003**                              |       | **2002** |   | **2003** |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| **Net Sales and revenue:**                             |   |                                   |       |                                  |       |   |   |   |   |
| Wafer product sales                                    |   | $                                      | 2,011,670  |                                  | $          | 3,743,875 |   | $ | 4,992,987 |   | $ | 7,951,775 |   |
| Contract and other revenue                             |   | 60,701                                 |       | 66,834                                |       | 232,761 |   | 592,899 |   |
| Equipment revenue                                      |   | 5,657,605                              |       | 226,114                               |       | 5,987,565 |   | 8,622,289 |   |
| Total net sales and revenue (notes 2 and 6)            |   | 7,729,976                              |       | 4,036,823                             |       | 11,213,313 |   | 17,166,963 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| **Cost of sales and revenue:**                         |   |                                   |       |                                  |       |   |   |   |   |
| Cost of wafer product sales                            |   | 3,995,509                              |       | 5,010,417                             |       | 10,278,147 |   | 12,516,260 |   |
| Cost of contract and other revenue                     |   | 9,819                                  |       | 6,330                                 |       | 97,076 |   | 34,332 |   |
| Cost of equipment revenue                              |   | 3,573,559                              |       | 208,888                               |       | 3,732,403 |   | 4,014,590 |   |
| Total cost of sales and revenue                        |   | 7,578,887                              |       | 5,225,635                             |       | 14,107,626 |   | 16,565,182 |   |
| Gross profit (loss)                                    |   | 151,089                                |       | (1,188,812                            | )          | (2,894,313 | ) | 601,781 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| **Operating expenses:**                                |   |                                   |       |                                  |       |   |   |   |   |
| General and administrative                             |   | 502,183                                |       | 477,253                               |       | 1,643,802 |   | 1,663,800 |   |
| Marketing and selling                                  |   | 382,303                                |       | 297,519                               |       | 1,155,703 |   | 957,988 |   |
| Research and development                               |   | 1,604,539                              |       | 1,175,064                             |       | 4,614,678 |   | 4,208,360 |   |
| Total operating expenses                               |   | 2,489,025                              |       | 1,949,836                             |       | 7,414,183 |   | 6,830,148 |   |
| Loss from operations                                   |   | (2,337,936                             | )          | (3,138,648                            | )          | (10,308,496 | ) | (6,228,367 | ) |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| **Other income (expense):**                            |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Interest income                                        |   | 68,017                                 |       | 9,564                                 |       | 231,816 |   | 49,462 |   |
| Interest expense                                       |   | (2,672                                 | )          | (33,753                               | )          | (9,057 | ) | (46,728 | ) |
| Other                                                  |   | —                                 |       | —                                |       | — |   | 3,725 |   |
| Total other income                                     |   | 65,345                                 |       | (24,189                               | )          | 222,759 |   | 6,459 |   |
| Loss before income taxes                               |   | (2,272,591                             | )          | (3,162,837                            | )          | (10,085,737 | ) | (6,221,908 | ) |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| Income tax expense                                     |   | —                                 |       | —                                |       | 1,256 |   | 1,256 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| Net loss (note2)                                       |   | $                                      | (2,272,591 | )                                     | $          | (3,162,837 | ) | $ | (10,086,993 | ) | $ | (6,223,164 | ) |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| Net loss per common share:                             |   |                                   |       |                                  |       |   |   |   |   |
| Basic                                                  |   | $                                      | (0.24      | )                                     | $          | (0.33 | ) | $ | (1.11 | ) | $ | (0.66 | ) |
| Diluted                                                |   | $                                      | (0.24      | )                                     | $          | (0.33 | ) | $ | (1.11 | ) | $ | (0.66 | ) |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| Weighted average number of common shares  outstanding: |   |                                   |       |                                  |       |   |   |   |   |
| Basic                                                  |   | 9,436,170                              |       | 9,504,210                             |       | 9,126,317 |   | 9,486,532 |   |
| Diluted (note5)                                        |   | 9,436,170                              |       | 9,504,210                             |       | 9,126,317 |   | 9,486,532 |   |

 

Seeaccompanying notes to unaudited interim financial statements.

 

4

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**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
|                                                                             |   | **Nine months  ended  September 30,** |        |
|----------------------------------------------------------------------------------|--------|---------------------------------------|-------------|
|                                                                             |   | **2002**                              |        | **2003** |   |
|                                                                             |   |                                  |        |   |   |
| **Cash flows from operating activities:**                                        |   |                                  | ** **  |   | ** ** |
| Net loss                                                                         |   | $                                     | (10,086,993 | ) | $ | (6,223,164 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                  |        |   |   |
| Depreciation and amortization                                                    |   | 4,657,960                             |        | 5,014,576 |   |
| Changes in operating assets and  liabilities:                                    |   |                                  |        |   |   |
| Accounts receivable, trade                                                       |   | 4,213,188                             |        | 1,395,212 |   |
| Unbilled revenue                                                                 |   | —                                |        | (528,581 | ) |
| Inventories                                                                      |   | (657,473                              | )           | (1,504,680 | ) |
| Deferred Costs                                                                   |   | —                                |        | 2,621,580 |   |
| Prepaid expenses and other current assets                                        |   | 350,951                               |        | (181,803 | ) |
| Accounts payable                                                                 |   | 2,578,960                             |        | 1,531,808 |   |
| Accrued liabilities and deferred revenue                                         |   | (6,002,178                            | )           | (6,536,157 | ) |
|                                                                             |   |                                  |        |   |   |
| Net cash used in operating activities                                            |   | (4,945,585                            | )           | (4,411,209 | ) |
|                                                                             |   |                                  |        |   |   |
| **Cash flows from investing activities:**                                        |   |                                  |        |   |   |
| Additions to  property and equipment, net                                        |   | (6,321,822                            | )           | (1,842,398 | ) |
| Other assets                                                                     |   | (81,434                               | )           | (94,416 | ) |
|                                                                             |   |                                  |        |   |   |
| Net cash used in investing activities                                            |   | (6,403,256                            | )           | (1,936,814 | ) |
|                                                                             |   |                                  |        |   |   |
| **Cash flows from financing activities:**                                        |   |                                  |        |   |   |
| Payments of  capital lease obligations                                           |   | (1,134,792                            | )           | (1,115,356 | ) |
| Exercise of stock options and warrants                                           |   | 183,081                               |        | 585,365 |   |
| Proceeds from sale of common stock net of  issuance costs                        |   | 12,113,469                            |        | — |   |
|                                                                             |   |                                  |        |   |   |
| Net cash provided (used) by financing  activities                                |   | 11,161,758                            |        | (529,991 | ) |
|                                                                             |   |                                  |        |   |   |
| Net decrease in  cash and cash equivalents                                       |   | (187,083                              | )           | (6,878,014 | ) |
|                                                                             |   |                                  |        |   |   |
| Cash and cash equivalents, beginning of  period                                  |   | 13,087,799                            |        | 11,745,918 |   |
|                                                                             |   |                                  |        |   |   |
| Cash and cash equivalents, end of period                                         |   | $                                     | 12,900,716  |   | $ | 4,867,904 |   |
|                                                                             |   |                                  |        |   |   |
| **Supplemental disclosure of cash flow  information:**                           |   |                                  |        |   |   |
| Cash paid during the period for interest                                         |   | $                                     | 9,057       |   | $ | 46,728 |   |

 

See accompanying notes to unaudited interimfinancial statements.

 

5

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**IBISTECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED** INTERIM FINANCIAL STATEMENTS

 

 

**(1) Interim FinancialStatements**

 

Theaccompanying financial statements are unaudited and have been prepared by theCompany in accordance with accounting principles generally accepted in theUnited States of America.

 

In the opinion of management, the interim financial statements includeall adjustments, which consist only of normal and recurring adjustments,necessary for a fair presentation of the Company’s financial position andresults of operations.  Results ofoperations for the interim periods are not necessarily indicative of theresults to be expected for the full year. These financial statements should be read in conjunction with thefinancial statements of the Company as of and for the year ended December 31,2002 which are included in the Company’s Annual Report on Form 10-K.

 

**(2) Summary ofSignificant Accounting Policies**

 

***(a) Revenue Recognition***

 

The Company recognizesrevenue from product sales, equipment sales and the sales of spare parts whenall of the following criteria have been met: (1) evidence exists that the customer is bound to the transaction; (2)the sales price to the customer has been fixed or is determinable; (3) theproduct has been delivered to the customer and, when applicable, the producthas been installed and accepted by the customer; and (4) collectibility of thesales price is reasonably assured. Provisions for estimated sales returns and allowances are made at thetime the products are sold.  Revenue derived from contracts and servicesis recognized upon performance. Significant management judgments and estimates must be made and used inconnection with revenue recognized in any period.  Management analyzes various factors including a review ofspecific transactions, historical experience, credit worthiness of customersand current market and economic conditions. Changes in judgments based upon these factors could impact the timingand amount of revenue and cost recognized.

 

***(b)***  ***Stock-Based Compensation***

 

The Company accounts for its stock option plansunder the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees, and Related Interpretations.”  No stock-based compensation cost isreflected in net income (loss) for these plans, as all options granted underthese plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net income (loss) and income (loss)per share if we had applied the fair value recognition provisions of FASBStatement No. 123, “Accounting for Stock Based Compensation”, to stock basedcompensation:

 
|                                                                                                                                       |   | **For the  Three Months EndedSeptember 30,** |       | **For the  Nine Months EndedSeptember 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|---------------------------------------------|--------|
|                                                                                                                                       |   | **2002**                                     |       | **2003**                                    |   | **2002** |   | **2003** |   |
|                                                                                                                                       |   |                                         |       |                                        |   |   |   |   |   |
| Net loss,  as reported                                                                                                                     |   | $                                            | (2,272,591 | )                                           | $      | (3,162,837 | ) | $ | (10,086,993 | ) | $ | (6,223,164 | ) |
| Add:  Stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |   | (19,192                                      | )          | 18,185                                      |   | (2,710,532 | ) | (1,494,332 | ) |
| Pro-forma  net loss                                                                                                                        |   | $                                            | (2,291,783 | )                                           | $      | (3,144,652 | ) | $ | (12,797,525 | ) | $ | (7,717,496 | ) |
| Net loss  per share:                                                                                                                       |   |                                         |       |                                        |   |   |   |   |   |
| Basic and  diluted – as reported                                                                                                      |   | $                                            | (0.24      | )                                           | $      | (0.33 | ) | $ | (1.11 | ) | $ | (0.66 | ) |
| Basic and  diluted – pro-forma                                                                                                        |   | $                                            | (0.24      | )                                           | $      | (0.33 | ) | $ | (1.40 | ) | $ | (0.81 | ) |

 

6

----

 

The fair value of each stock option is estimated onthe date of grant using Black-Scholes option pricing model with the followingweighted-average assumptions:

 
|                                                               |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |       |
|--------------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                               |   | **2002**                               |       | **2003**                              |       | **2002** |   | **2003** |   |
|                                                               |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Risk-free  interest rate                                           |   | 2.62                                   | %          | 2.20                                  | %          | 3.38 | % | 2.01 | % |
| Expected  dividend yield                                           |   | 0.00                                   | %          | 0.00                                  | %          | 0.00 | % | 0.00 | % |
| Expected  volatility                                               |   | 115.4                                  | %          | 64.9                                  | %          | 103.0 | % | 73.1 | % |
| Expected  life (years)                                             |   | 3                                      |       | 3                                     |       | 3 |   | 3 |   |
| Weighted  average fair value of options granted during the quarter |   | $                                      | 5.19       |                                  | $          | 9.52 |   | $ | 7.25 |   | $ | 7.37 |   |
|                                                                    |        |                                        |            |                                       |            |  |  |  |  |  |  |  |  |

 

Pro-forma net loss reflects only options granted in1995 through 2003.  Therefore, the fullimpact of calculating compensation costs for stock options under SFAS No. 123is not reflected because compensation costs for options granted prior toJanuary 1, 1995, are not considered.

 

**(3) Inventories**

 

Inventories consist of the following:

 
|                  |   | **December  31,  2002** |      | **September  30,  2003** |   |
|-----------------------|--------|-------------------------|-----------|--------------------------|--------|
| Raw materials         |   | $                       | 810,740   |                     | $      | 1,700,107 |   |
| Work in process       |   | 94,090                  |      | 222,268                  |   |
| Finished goods        |   | 326,729                 |      | 813,864                  |   |
| Total wafer inventory |   | $                       | 1,231,559 |                     | $      | 2,736,239 |   |

 

**(4) Capitalizationand Subsequent Event**

 

InMarch 2002, Ibis completed a public offering of 900,000 shares of common stockat $13 per share, and on April 1, 2002, 100,000 shares were exercised as anover allotment option by the underwriter. Net proceeds to the Company were approximately$12,100,000.

 

InOctober 2003, Ibis completed a public offering of 1,000,000 shares of commonstock at $13.25 per share, including an over allotment option exercised by theunderwriter. Net proceeds to the Company were approximately $12,700,000.

 

**(5) Net Income (Loss)Per Share**

 

Netincome (loss) per share of common stock is computed based upon the weightedaverage number of shares outstanding during each period and including thedilutive effect, if any, of stock options and warrants.  SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented.  As the Company was in a net loss positionfor the three and nine months ended September 30, 2002 and September 30, 2003,common stock equivalents of 0, 70,611, 167,530 and 47,509, respectively, wereexcluded from the diluted loss per share calculation, as they would beantidilutive.  As a result, diluted lossper share is the same as basic loss per share for all periods presented.

 

7

----

 

**(6) SignificantCustomers and Concentration of Business Risk**

 

The Company sells its products to a limited number of semiconductor andoptical components manufacturers primarily in the United States and the PacificRim.

 

Sales for significant customers are shown in dollar amounts and as apercentage of total revenue as follows:

 
|                                  |   | **Significant  Customers** |   | **Amount** |       | **%**  |   |
|---------------------------------------|--------|----------------------------|--------|------------|------------|--------|--------|
|                                  |   |                       |   |       |       |   |   |
| Three Months Ended September 30, 2002 |   | 3                          |   | $          | 7,352,240  |   | 95     | % |
| Three Months Ended September 30, 2003 |   | 1                          |   | $          | 3,754,458  |   | 93     | % |
| Nine Months Ended September 30, 2002  |   | 3                          |   | $          | 9,498,549  |   | 85     | % |
| Nine Months Ended September 30, 2003  |   | 1                          |   | $          | 15,894,242 |   | 93     | % |

 

Accounts receivable and unbilled revenue fromsignificant customers at September 30, 2003 and December 31, 2002 amounted to$664,000 and $769,000, respectively.

 

**(7) Industry Segments**

 

The Company’sreportable segments are SIMOX Wafer Products, SIMOX Equipment and OtherProducts or Services.  For purposes ofsegment reporting, equipment, equipment spares and field service revenue arecombined and reported as SIMOX Equipment. Government contracts, other services and license revenue are combinedand reported as Other Products or Services.

 

The tablebelow provides unaudited information for the three and nine months endedSeptember 30, 2002 and 2003 pertaining to the Company’s three industrysegments.

** **
|                                                         |   | **SIMOX  Wafer  Products** |      | **SIMOX  Equipment** |   | **Other Products****or Services** |   | **Total**  |   |
|--------------------------------------------------------------|--------|----------------------------|-----------|----------------------|--------|-----------------------------------|--------|------------|--------|
| **Net Sales and  Revenue**                                   |   |                       |      |                 |   |                              |   |       |   |
| Three Months Ended September 30, 2002                        |   | $                          | 2,011,670 |                 | $      | 5,657,605                         |   | $          | 60,701 |   | $ | 7,729,976 |   |
| Three Months Ended September 30, 2003                        |   | 3,743,875                  |      | 226,114              |   | 66,834                            |   | 4,036,823  |   |
| Nine Months Ended September 30, 2002                         |   | 4,992,987                  |      | 5,987,565            |   | 232,761                           |   | 11,213,313 |   |
| Nine Months Ended September 30, 2003                         |   | 7,951,775                  |      | 8,622,289            |   | 592,899                           |   | 17,166,963 |   |
|                                                         |   |                       |      |                 |   |                              |   |       |   |
| **Operating Income  (Loss)**                                 |   |                       |      |                 |   |                              |   |       |   |
| Three Months Ended September 30, 2002                        |   | (2,051,941                 | )         | 165,306              |   | 50,882                            |   | (1,835,753 | )      |
| Three Months Ended September 30, 2003                        |   | (1,688,610                 | )         | (1,033,289           | )      | 60,504                            |   | (2,661,395 | )      |
| Nine Months Ended September 30, 2002                         |   | (6,692,245                 | )         | (2,108,133           | )      | 135,684                           |   | (8,664,694 | )      |
| Nine Months Ended September 30, 2003                         |   | (5,893,762                 | )         | 770,628              |   | 558,567                           |   | (4,564,567 | )      |
|                                                         |   |                       |      |                 |   |                              |   |       |   |
| **Assets**                                                   |   |                       |      |                 |   |                              |   |       |   |
| September 30, 2003                                           |   | 31,665,209                 |      | 2,583,989            |   | 120,154                           |   | 34,369,352 |   |
|                                                         |   |                       |      |                 |   |                              |   |       |   |
| **Capital Expenditures**                                     |   |                       |      |                 |   |                              |   |       |   |
| Three Months Ended September 30, 2002                        |   | 2,976,958                  |      | 20,561               |   | —                            |   | 2,997,519  |   |
| Three Months Ended September 30, 2003                        |   | 421,204                    |      | 8,890                |   | —                            |   | 430,094    |   |
| Nine Months Ended September 30, 2002                         |   | 6,052,233                  |      | 124,339              |   | —                            |   | 6,176,572  |   |
| Nine Months Ended September 30, 2003                         |   | 1,812,265                  |      | 8,890                |   | —                            |   | 1,821,155  |   |
|                                                         |   |                       |      |                 |   |                              |   |       |   |
| **Depreciation and Amortization of Property  and Equipment** |   |                       |      |                 |   |                              |   |       |   |
| Three Months Ended September 30, 2002                        |   | 1,168,493                  |      | 359,575              |   | —                            |   | 1,528,068  |   |
| Three Months Ended September 30, 2003                        |   | 1,323,844                  |      | 341,990              |   | —                            |   | 1,665,834  |   |
| Nine Months Ended September 30, 2002                         |   | 3,472,047                  |      | 1,117,652            |   | —                            |   | 4,589,699  |   |
| Nine Months Ended September 30, 2003                         |   | 3,872,097                  |      | 1,052,813            |   | —                            |   | 4,924,910  |   |
|                                                              |        |                            |           |                      |        |                                   |        |            |        |  |  |  |  |

 

8

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The table below provides the reconciliationof reportable segment operating loss and assets to Ibis’ totals.

 
|                                                         |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |       |
|--------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                         |   | **2002**                               |       | **2003**                              |       | **2002** |   | **2003** |   |
| **Segment  Reconciliation**                                  |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
|                                                         |   |                                   |       |                                  |       |   |   |   |   |
| Loss  Before Income Taxes:                                   |   |                                   |       |                                  |       |   |   |   |   |
| Total  operating loss for reportable segments                |   | $                                      | (1,835,753 | )                                     | $          | (2,661,395 | ) | $ | (8,664,694 | ) | $ | (4,564,567 | ) |
| Corporate  general & administrative expenses             |   | (502,183                               | )          | (477,253                              | )          | (1,643,802 | ) | (1,663,800 | ) |
| Net other  income (expense)                                  |   | 65,345                                 |       | (24,189                               | )          | 222,759 |   | 6,459 |   |
| Loss  before income taxes                                    |   | (2,272,591                             | )          | (3,162,837                            | )          | (10,085,737 | ) | (6,221,908 | ) |
|                                                         |   |                                   |       |                                  |       |   |   |   |   |
| Capital  Expenditures:                                       |   |                                   |       |                                  |       |   |   |   |   |
| Total  capital expenditures for reportable segments          |   | 2,997,519                              |       | 430,094                               |       | 6,176,572 |   | 1,821,155 |   |
| Corporate  capital expenditures                              |   | 88,621                                 |       | —                                |       | 145,250 |   | 21,243 |   |
| Total  capital expenditures                                  |   | $                                      | 3,086,140  |                                  | $          | 430,094 |   | $ | 6,321,822 |   | 1,842,398 |   |
|                                                         |   |                                   |       |                                  |       |   |   |   |   |
| Depreciation  and Amortization:                              |   |                                   |       |                                  |       |   |   |   |   |
| Total  depreciation and amortization for reportable segments |   | 1,528,068                              |       | 1,665,834                             |       | 4,589,699 |   | 4,924,910 |   |
| Corporate  depreciation and amortization                     |   | 22,837                                 |       | 22,790                                |       | 68,261 |   | 89,666 |   |
| Total  depreciation and amortization                         |   | $                                      | 1,550,905  |                                  | 1,688,624  |   | 4,657,960 |   | 5,014,576 |   |
|                                                              |        |                                        |            |                                       |            |  |  |  |  |  |  |  |  |

 

 
|                                                   |   |   |   |   |   | **Balance as  of  9/30/03** |       |   | ** ** |
|--------------------------------------------------------|--------|--------|--------|--------|--------|-----------------------------|------------|--------|------------|
| Assets:                                                |   |   |   |   |   |                        |       |   |       |
| Total  assets for reportable segments                  |   |   |   |   |   | $                           | 34,369,352 |   |       |   |
| Cash &  cash equivalents not allocated to segments |   |   |   |   |   | 4,867,904                   |       |   |       |
| Other  unallocated assets                              |   |   |   |   |   | 704,199                     |       |   |       |
| Total  assets                                          |   |   |   |   |   | $                           | 39,941,455 |   |       |   |

 

**(8) New AccountingPronouncements**

 

Statement of Financial Accounting Standards No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections,”  iseffective for fiscal years beginning May 15, 2002 or later that rescinds FASBStatement No. 4, Reporting Gains and Losses from Extinguishment of Debt, FASBStatement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,and FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers.This Statement Amends FASB Statement No. 4 and FASB Statement No. 13,Accounting for Leases, to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions. This Statement also amends otherexisting authoritative pronouncements to make various technical corrections,clarify meanings, or describe their applicability under changed conditions. TheCompany adopted SFAS 145 during the first quarter of 2003 without a materialimpact on its financial condition or results of operations.

 

9

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Statement ofFinancial Accounting Standards No. 146, “Accounting for Costs Associated withExit or Disposal Activities,”is effective for exit or disposal activities thatare initiated after December 31, 2002. This Statement addresses financial accounting and reporting for costsassociated with exit or disposal activities and requires companies to recognizecosts associated with exit or disposal activities when they are incurred ratherthan at the date of commitment to an exit or disposal plan. The Company adoptedSFAS 146 during the first quarter of 2003 without a material impact on itsfinancial condition or results of operations.

 

In November 2002,the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, which clarifies disclosure and recognition/measurementrequirements related to certain guarantees. The disclosure requirements are effective for financial statementsissued after December 15, 2002 and the recognition/measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The application ofthe requirements of FIN 45 did not have a material impact on the Company’sfinancial position or results of operations.

 

Statement of Financial Accounting Standards No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure—an amendmentof FASB Statement No. 123,” is effective for fiscal years ending after December15, 2002. This Statement amends FASB Statement No. 123, Accounting forStock-Based Compensation, to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, this Statement amends the disclosurerequirements of Statement 123 to require prominent disclosures in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.The Company adopted SFAS 148 during the first quarter of 2003 without amaterial impact on its financial condition or results of operations.

 

In April 2003, FASB issued Statement No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities(SFAS 149), which amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts (collectively referred to as derivatives) and for hedgingactivities under FASB Statement No. 133, Accounting for Derivative Instrumentsand Hedging Activities.  SFAS 149 iseffective prospectively for contracts entered into or modified after June 30,2003, except as stated below and for hedging relationships designated afterJune 30, 2003.  The provisions of thisStatement that relate to Statement 133 Implementation Issues that have beeneffective for fiscal quarters that began prior to June 15, 2003, shouldcontinue to be applied in accordance with their respective effectivedates.  In addition, paragraphs 7 (a)and 23 (a), which relate to forward purchases or sales of when-issuedsecurities or other securities that do not yet exist, should be applied to bothexisting contracts and new contracts entered into after June 30, 2003.  The adoption of this Statement did not havea material impact on the Company’s financial condition or results ofoperations.

 

In May 2003, FASB issued Statement No. 150, Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity (SFAS 150), which establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity.  SFAS 150 is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003, except for mandatory redeemable preferred financialinstruments of nonpublic companies.  Itis to be implemented by reporting the cumulative effect of a change inaccounting principle for financial instruments created before the issuance dateof the Statement and still existing at the beginning of the interim period ofadoption.  Restatement is notpermitted.  The adoption of thisStatement did not have a material impact on the Company’s financial conditionor results of operations.

 

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**IBISTECHNOLOGY CORPORATION**

 

**PARTI - ITEM 2**

 

**MANAGEMENT’S DISCUSSIONAND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

IbisTechnology Corporation (“Ibis”) was formed in October 1987 and commencedoperations in January 1988. Ibis’ initial activities consisted of producing andselling SIMOX-SOI wafers and conducting research and development activities.This research led to the development of proprietary next generation oxygenimplanters, the Ibis 1000, which we began selling in 1996, and the i2000, andalso to other proprietary process technology.

 

Initially,much of our revenue was derived from research and development contracts andsales of wafers for military applications. Over the years, there was a shift inrevenue to sales of SIMOX-SOI wafers for commercial applications and the natureof our business has evolved through stages where sometimes our revenuesresulted primarily from selling wafers for evaluation purposes, and sometimesour revenue was generated primarily from equipment sales. This is a normal pathto follow while developing and promoting a fundamental new technology,especially when it relates to the semiconductor industry embracing any changethat affects fabrication operations. This trend is expected to continue in the near-term as our customerscontinue to sample SOI and the early adopters work to achieve stable productionprocesses and enter pilot production. We believe that we are in the technologyrollout stage of our corporate life cycle with respect to our i2000 SIMOX-SOIimplanters.

 

Ourfundamental SIMOX-SOI technology has been developed, refined, and proven overthe last dozen years.  In 2002, weintroduced the next generation of SIMOX-SOI technology, which included oursecond-generation oxygen implanter (i2000) and the modified low dose (“MLD”)SIMOX wafer process, licensed to Ibis by IBM. We believe the ability of thei2000 implanter to produce eight and twelve-inch (or 200 and 300 mm) SIMOX-SOIwafers coupled with the MLD process positions us to capitalize on the growingSOI market. In September 2002, we received an order valued at approximately $8million for an i2000 oxygen implanter from a major semiconductor manufacturer.During the second quarter ended June 30, 2003, our largest customer acceptedthe i2000 implanter that we shipped to them late last year. As a result of thisacceptance, we recognized revenue of approximately $8 million in the secondquarter ended June 30, 2003.

 

Commercialshipments of our wafers have been used principally for evaluation purposes orpilot production in products, including microprocessors, gate arrays, ASICs(application specific integrated circuits), memories (DRAMs, SRAMs, etc.), andcellular and mobile radio components. From our customers’ perspective, thepathway to SOI adoption is complex and time consuming.  Typically, a customer will go through threemajor stages:

 

•                                            Sampling,where preliminary performance characteristics are explored and verified;

•                                            R&D,where specific customer specifications are tested and developed; and

•                                            Production,where yield and cost benefits are optimized.

 

Eachof these stages has many steps, and customers must evaluate each new wafertechnology that essentially lays a new foundation for substantially all otherprocesses they have spent billions of dollars and decades of timedeveloping.  Accordingly, it takesanywhere from 12 to 36 months for a customer to proceed from initial samplingthrough R&D to initial production, which is not unlike the standard processfor qualifying any new wafer material. These steps apply each time there is a change in the customer’sfabrication process, such as a feature-size change or new material.  To date, most of our customers havepurchased wafers for the purpose of characterizing and evaluating the wafers,developing prototype products or for pilot production, consequently historicalsales are not necessarily an indication of future operations.

 

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At September 30, 2003, Ibis had eight Ibis 1000implanters, two of which are owned by a customer, available to produce up to200 mm SIMOX wafers and two i2000’s available to produce 300 mm SIMOXwafers.  Our second balance-of-processline (annealing, cleaning, metrology) has been fully qualified and is nowavailable for completing the manufacture of 300-millimeter SIMOX-SOI wafers.One more Ibis 1000 implanter is available for sale and an additional one isdedicated as a research and development tool. We also have one additional i2000 implanter under construction that willbe available for sale or utilized internally for wafer production. Although our200 mm and smaller wafer size production line is currently underutilized,considering our future plans, current potential business prospects andalternatives, Management believes that we do not have an impairment issue atthis time. However, if our future plans and potential business prospects do notmaterialize, if semiconductor manufacturers fail to adopt SIMOX technology duringthe current process cycle (which typically last two to three years) or ourcustomers transition to the 300 mm wafer size sooner than we anticipate, our200 mm and smaller wafer size production line may become obsolete and we wouldbe required to reduce our income by an impairment loss which could be material.

 

Wewill continue to review our assumptions about our long-lived assets on aperiodic basis for potential impairment in future quarters.  We cannot be sure that our implanters orother long-lived assets will not become impaired in the future. In addition,the impairment factors evaluated by Management may change in subsequentperiods, given the current trends of the business environment.

 

Ibishas experienced quarterly and annual fluctuations in revenue and results ofoperations due to the timing of receipt of equipment orders and dependence on alimited number of customers.  We expectto continue to experience fluctuations in revenue due to equipment sales andshifts in customer demands during various stages of the SIMOX-SOI salescycle.  We recognize implanter revenuein accordance with SEC Staff Accounting Bulletin No. 101, which includes amongother criteria, the shipment, factory installation and acceptance of theimplanter at the customer’s location. As a result, deferral of revenue may extend longer due to meeting thesecriteria.

 

**Critical AccountingPolicies**

* *

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that have a significant impact on the results wereport in our financial statements. Some of our accounting policies require usto make difficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain. Our most criticalaccounting policies include: revenue recognition, inventory valuation andreserves, accounts receivable reserves and the assessment of long-lived assetimpairment. Actual results may differ from these estimates under differentassumptions or conditions.  Below, wediscuss these policies further, as well as the estimates and judgmentsinvolved.

* *

***RevenueRecognition.***  We recognize revenue from productsales, equipment sales and the sales of spare parts when all of the followingcriteria have been met:  (1) evidenceexists that the customer is bound to the transaction; (2) the sales price tothe customer has been fixed or is determinable; (3) the product has beendelivered to the customer and, when applicable, the product has been installedand accepted by the customer; and (4) collectibility of the sale price isreasonably assured.  Provisions forestimated sales returns and allowances are made at the time the products aresold.  Revenue derived from contractsand services is recognized upon performance.  Significant management judgments and estimates must be made and used inconnection with revenue recognized in any period.  Management analyzes various factors, including a review of specifictransactions, historical experience, credit worthiness of customers and currentmarket and economic conditions.  Changesin judgments based upon these factors could impact the timing and amount ofrevenue and cost recognized.

 

12

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***InventoryValuation and Reserves***.  Our policy for thevaluation of inventory, including the determination of obsolete or excessinventory, requires us to estimate the future demand for our products withinspecific time horizons, generally twelve months or less. If our estimateddemand for specific products is greater than actual demand and we fail toreduce manufacturing output accordingly, we could be required to recordadditional inventory reserves, which would have a negative impact on our grossmargin. We reserve for a possible over supply of wafers utilizing inventoryaging records and for obsolescence when engineering changes or othertechnological advances indicate that obsolescence has occurred.  We also adjust the valuation of inventorywhen estimated actual cost is significantly different than standard cost andvalue inventory at the lower of cost or market. Once established, anywrite-downs of inventory are considered permanent adjustments to the cost basisof the inventory.

* *

***AccountsReceivable Reserves***.  Accounts receivable are reduced byan allowance for amounts that may become uncollectible in the future.  The estimated allowance for uncollectibleamounts is based primarily on a specific analysis of accounts in the receivableportfolio and a general reserve based on the aging of receivables andhistorical write-off experience.  Whilemanagement believes the allowance to be adequate, if the financial condition ofour customers were to deteriorate, resulting in impairment of their ability tomake payments, additional allowances may be required and could materiallyimpact our financial position and results of operations.

 

***Valuationof Long-Lived Assets***.  Ibis reviews the valuation oflong-lived assets, including property and equipment and licenses, under theprovisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-LivedAssets.  Management is required toassess the recoverability of its long-lived assets whenever events andcircumstances indicate that the carrying value may not be recoverable.  Factors we consider important that couldtrigger an impairment review include the following:

* *

*•*                  Significant underperformancerelative to expected historical or projected future operating results;

*•*                  Significant changes in the manner ofour use of the acquired assets or the strategy of our overall business;

*•*                  Significant negative industry oreconomic trends;

*•*                  Significant decline in our stockprice for a sustained period; and

*•*                  Our market capitalization relativeto book value.

* *

*In accordance with SFAS No. 144,when we determine that the carrying value of applicable long-lived assets maynot be recoverable based upon the existence of one or more of the aboveindicators of impairment, we evaluate whether the carrying amount of the assetexceeds the sum of the undiscounted cash flows expected to result from the useand eventual disposition of that asset. If such a circumstance exists, we would measure an impairment loss tothe extent the carrying amount of the particular long-lived asset or groupexceeds its fair value.  We woulddetermine the fair value based on a projected discounted cash flow method usinga discount rate determined by our management to be commensurate with the risk inherentin our current business model.*

 

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**Results of Operations**

 

***Third Quarter EndedSeptember 30, 2003 Compared to Third Quarter Ended September 30, 2002***

 

***Wafer Product Sales***.  Wafer product sales increased $1,732,205 or86%, to $3,743,875 for the third quarter ended September 30, 2003 from$2,011,670 for the third quarter ended September 30, 2002.  Wafer product sales this quarter were higherdue to increased 300 mm SIMOX wafer demand from one customer. We qualified asecond 300 mm SIMOX wafer production line at Ibis in the first quarter of thisyear which increased our ability to ship 300 mm wafers.  Sales of 300 mm wafers this quarteraccounted for 98% of wafer sales compared to 32% the same quarter last year.

 

***Contract and OtherRevenue***.  Contract and other revenue includes revenuederived from government contracts, license agreements, characterization andother services.  Contract and otherrevenue increased for the third quarter ended September 30, 2003 to $66,834from $60,701 for the third quarter ended September 30, 2002, an increase of$6,133 or 10%.  This is attributable toan increase in license revenue.

 

***EquipmentRevenue. ***Equipmentrevenue represents revenue recognized from sales of implanters, spare parts andfield service.  Equipment revenuedecreased to $226,114 for the third quarter ended September 30, 2003 from$5,657,605 for the third quarter ended September 30, 2002, a decrease of$5,431,491 or 96%. Equipment revenue in this quarter consisted solely of partsand service revenue, whereas, the third quarter of last year includedapproximately $5 million from the sale of an Ibis 1000 implanter to a Chinesecustomer. Field service revenue accounted for $69,300 for the third quarterended September 30, 2003 as compared to $78,520 for the same period lastyear.  Sales of spare parts accountedfor $156,814 of equipment revenue for the third quarter ended September 30,2003 as compared to $579,085 of equipment revenue for the third quarter endedSeptember 30, 2002.

 

***Total Net Sales andRevenue***. Total net sales and revenue for the third quarter ended September 30,2003 was $4,036,823, a decrease of $3,693,153, or 48%, from total net revenueof $7,729,976 for the third quarter ended September 30, 2002.  This decrease is a result of no implantersales in the quarter which was partially offset by an increase in 300 mm SIMOXwafer sales.

 

***Total Cost of Salesand Revenue***.  Cost of wafer product sales for the thirdquarter ended September30, 2003 was $5,010,417, compared to $3,995,509 for thethird quarter ended September 30, 2002, an increase of $1,014,908, or 25%.  This is attributable to increased 300 mmwafer sales along with increased fixed costs, mainly depreciation andamortization of 300 mm equipment, and an increase in the wafer inventoryobsolescence reserve.  We increased ourinventory obsolescence reserve for 200 mm wafers that were manufactured underan older process and for an oversupply of wafers calculated using our inventoryaging reports.  Cost of contract andother revenue consists of labor and materials expended during the quarter.  Cost of contract and other revenue for thethird quarter ended September 30, 2003 was $6,330, as compared to $9,819 forthe third quarter ended September 30, 2002, a decrease of $3,489, or 36%.  This is attributable to a decrease inmaterial costs associated with other revenue. Cost of equipment revenue represents the cost of equipment and spareparts, along with labor incurred for field service.  Cost of equipment revenue for the third quarter ended September30, 2003 was $208,888, as compared to $3,573,559 for the third quarter endedSeptember 30, 2002. Costs this quarter are for equipment parts and service,whereas the costs for the quarter ended September 30, 2002 included the cost ofthe Ibis 1000 implanter which was recognized as revenue that quarter inaccordance with SAB 101.

 

14

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Total cost of sales and revenue for the third quarterended September 30, 2003 was $5,225,635 as compared to $7,578,887 for the thirdquarter ended September 30, 2002, a decrease of $2,353,252 or 31%.  The gross margin for all sales was anegative 29% for the third quarter ended September 30, 2003 as compared to agross margin of 2% for the third quarter ended September 30, 2002.  This decrease in the gross margin for allsales is attributable to the gross margin achieved on the Ibis 1000 implantersale to China last year, which was offset by improved margins on wafer salesdue to increased volumes in this quarter. Our wafer production line for smallerwafer sizes is currently underutilized and we believe that as sales volumes ofall wafer sizes increase, the wafer product gross margins should improve.

 

***General andAdministrative Expenses***.  General and administrative expenses for the third quarter endedSeptember 30, 2003 were $477,253 (or 12% of total revenue) as compared to$502,183 (or 6% of total revenue) for the third quarter ended September 30,2002, a decrease of $24,930, or 5%. This is due to decreased payroll, payroll related expenses andprofessional services as a result of cost savings initiated by Ibis. Thesesavings were offset by an increase in Director’s & Officer’s liabilityinsurance.

 

***Marketing andSelling Expenses***. Marketing and selling expenses for the third quarter ended September 30,2003 were $297,519 (or 7% of total revenue) as compared to $382,303 (or 5% oftotal revenue) for the third quarter ended September 30, 2002, a decrease of $84,784, or 22%.  This is a result of adecrease in promotional expenses and payroll and payroll related expensesresulting from cost savings initiatives.

 

***Research andDevelopment Expenses.***  Internally funded research and development expenses decreased by$429,475 or 27%, to $1,175,064 (or 29% of total revenue) for the third quarterended September 30, 2003, as compared to $1,604,539 (or 21% of total revenue)for the third quarter ended September 30, 2002.  This is due to reduced payroll, payroll related expenses andconsulting services relating to the i2000 implanters, which were initiatedthrough cost savings programs implemented this year.

 

***Other Income(Expense)*.** Total other expense for the third quarter ended September 30, 2003 was$24,189 as compared to income of $65,345 for the third quarter ended September30, 2002, a decrease of $89,534, or 137%. The decrease in total other income is attributable to decreased interestincome earned as a result of lower average cash balances and a reduction in theinterest rates, along with increased interest expense due to a financingarrangement entered into during the second quarter of 2003.

 

***Nine Months EndedSeptember 30, 2003 Compared to Nine Months Ended September 30, 2002***

 

***Wafer Product Sales***.  Wafer product sales increased $2,958,788 or59%, to $7,951,775 for the nine months ended September 30, 2003 from $4,992,987for the nine months ended September 30, 2002. This is attributable to increased demand of 300 mm SIMOX wafers. Salesof 300 mm wafers accounted for 92% and 19% of total product sales for the ninemonths ended September 30, 2003 and 2002, respectively.

 

***Contract and OtherRevenue***.  Contract and other revenue increased for thenine months ended September 30, 2003 to $592,899 from $232,761 for the ninemonths ended September 30, 2002, an increase of $360,138 or 155%.  This increase is attributable to revenuerecognized from the transfer of wafer technology to a customer pursuant to alicense transfer agreement.  Royaltyfees also increased, but these were offset by a decrease in government contractwork.

 

15

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***EquipmentRevenue. ***Equipmentrevenue increased to $8,622,289 for the nine months ended September 30, 2003from $5,987,565 for the nine months ended September 30, 2002, an increase of$2,634,724, or 44%.  Revenue during thenine months ended September 30, 2003, included approximately $8 million fromthe sale of an i2000 implanter compared to the nine months ended September 30,2002 which included approximately $5 million from the sale of an Ibis 1000implanter and parts to a Chinese customer. Field service revenue accounted for $209,150 of equipment revenue forthe nine months ended September 30, 2003 as compared to $219,370 of equipmentrevenue for the same period last year. Sales of spare parts accounted for $420,233 of equipment revenue for thenine months ended September 30, 2003 as compared to $768,195 of equipmentrevenue for the nine months ended September 30, 2002.

 

***Total Net Sales andRevenue***. Total net sales and revenue for the nine months ended September 30, 2003was $17,166,963, an increase of $ 5,953,650, or 53%, from total net revenue of$11,213,313 for the nine months ended September 30, 2002.

 

***Total Cost of Salesand Revenue*****.**  Cost of wafer product sales for the ninemonths ended September 30, 2003 was $12,516,260, compared to $10,278,147 forthe nine months ended September 30, 2002, an increase of $2,238,113, or22%.  This is attributable to increasedsales of 300 mm wafers along with increased fixed costs, mainly depreciationand amortization of 300 mm equipment. Cost of contract and other revenue for the nine months ended September30, 2003 was $34,332, as compared to $97,076 for the nine months endedSeptember 30, 2002, a decrease of $62,744, or 65%.  This decrease is primarily attributable to a decrease in workperformed on contracts.  Cost ofequipment revenue for the nine months ended September 30, 2003 was $4,014,590,as compared to $3,732,403 for the nine months ended September 30, 2002, anincrease of $282,187 or 8%.  Thisincrease is due to the costs recognized for the i2000 implanter sold duringthis period as compared to the costs recognized for the Ibis 1000 sold lastyear, which was offset by the decrease in costs for parts sold.  As a result of the foregoing, the total costof sales and revenue for the nine months ended September 30, 2003 was$16,565,182 as compared to $14,107,626 for the nine months ended September 30,2002, an increase of $2,457,556 or 17%. The gross margin for all sales was 4% for the nine months endedSeptember 30, 2003 as compared to a negative gross margin of 26% for the ninemonths ended September 30, 2002.  Thisimprovement in the gross margin for all sales is attributable to a 55% grossmargin achieved on the i2000 implanter sale, as well as improved margins on wafersales due to increased volumes.

 

***General andAdministrative Expenses***.  General and administrative expenses for the nine months endedSeptember 30, 2003 were $1,663,800 (or 10% of total revenue) as compared to $1,643,802 (or 15% of total revenue) for the nine months ended September 30,2002, an increase of $19,998, or 1%. This is primarily a result of an increase in D&O insurance which wasoffset by decreases in payroll and payroll related expenses and professionalservices.

 

***Marketing andSelling Expenses***. Marketing and selling expenses for the nine months ended September 30,2003 were $957,988 (or 6% of total revenue) as compared to $1,155,703 (or 10%of total revenue) for the nine months ended September 30, 2002, a decrease of$197,715, or 17%.  The decrease inmarketing and selling expenses is primarily a result of decreases in payrolland payroll related expenses, travel and promotional expenses due to costsavings initiatives.

 

***Research andDevelopment Expenses.***  Internally funded research anddevelopment expenses decreased by $406,318 or 9%, to $4,208,360 (or 25% oftotal revenue) for the nine months ended September 30, 2003, as compared to$4,614,678 (or 41% of total revenue) for the nine months ended September 30,2002.  This decrease is mainly due todecreased R&D activity on the i2000 implanter program, which was partiallyoffset by increased activity on joint SIMOX-SOI wafer development programs.

 

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***Other Income(Expense)*.** Total other income for the nine months ended September 30, 2003 was$6,459 as compared to $222,759 for the nine months ended September 30, 2002, adecrease of $216,300, or 97%.  Thedecrease in total other income is primarily attributable to decreased interestincome earned as a result of lower average cash balances and a reduction ininterest rates, along with increased interest expense due to expense due to afinancing arrangement entered into during the second quarter of 2003.

 

**Liquidity and CapitalResources**

 

As of September 30, 2003, Ibis had cash and cash equivalents of$4,867,904, reflecting the receipt of a majority of the proceeds from the saleof an i2000 implanter in December 2002, which was due upon shipment.  In addition, in March 2002, Ibis completed apublic offering of 900,000 shares of common stock at $13 per share, and onApril 1, 2002, 100,000 shares were exercised as an over allotment by theunderwriter.  The shares were includedin a shelf registration statement filed with the Securities and Exchange Commissionon July 8, 1999 and declared effective on July 26, 1999.  Net proceeds from the offering wereapproximately $12.1 million and were used primarily to fund research anddevelopment, capital expenditures and working capital.

 

Duringthe nine months ended September 30, 2003, Ibis used $4,411,209 in cash foroperating activities compared to $4,945,585 for the same period in 2002.Depreciation and amortization expense for the nine months ended September 30,2003 and 2002 was $5,014,576 and $4,657,960, respectively.  This accounted for 29% and 42% of totalrevenue, respectively. Due to the capital intensive nature of Ibis’ businessand the recent expansion of our 300 mm SIMOX-SOI wafer production line,Management expects that depreciation and amortization will continue to be asignificant portion of its expenses.  Todate, Ibis’ working capital requirements have been funded primarily throughdebt and equity financings.  Ibis also used$1,842,398 during the nine months ended September 30, 2003 to fund additions toproperty and equipment as compared to $6,321,822 during the nine months endedSeptember 30, 2002.  At September 30,2003, Ibis had commitments to purchase approximately $403,361 of material to beused for manufacturing wafers and i2000 implanter parts and $40,025 in capitalequipment purchases.

 

As part of our cash management plan, we initiated additional costsaving measures during 2003.  Thisincluded the lay-off of twenty-nine employees, so our headcount is nowapproximately 80 employees. We also increased the number of days off that allemployees must use and established a salary reduction program throughout theCompany.  We expect these measures tosave us in excess of $2.5 million on an annual basis.

 

In June 2003, Ibis entered into an agreement with a financing agent toobtain payment for products from its largest customer on an expedited basis.The discount rate associated with this agreement is based on the prime rate andmay fluctuate.

 

In September 2001, Ibis entered into a $4.5 million equipment leaseline with Heller Financial’s Commercial Equipment Finance Group. The lease linewas used to finance the purchase of process equipment for wafer production,primarily for 300 mm wafers.  This linewas fully drawn down in two sale-leaseback transactions, bearing interest atapproximately 8% with a term of three years, and a monthly net payment of$131,212. Ibis has a fair market value purchase option at the end of the leaseterm.  The lease line is secured by theunderlying assets and all other property and equipment of Ibis.

 

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In October 2003, Ibis completed a public offering of 1,000,000 sharesof common stock at $13.25 per share, which included an over allotment optionexercised by the underwriter.  Netproceeds from the offering were approximately $12.7 million and will be usedprimarily to fund research and development, capital expenditures, workingcapital and general corporate purposes.

 

We estimate that we have adequate cash available for at least twelvemonths. Although we anticipate a fourth quarter slow down for 300 mm waferbusiness at our largest customer, forecasts from this customer and others for2004 continue to look positive. Forecasting future wafer sales, on aquarter-by-quarter basis, remains exceedingly difficult, and significantvariations, quarter to quarter, are likely. We continue to anticipate bookingorders for one-to-three implanters during the fourth quarter of 2003.

 

This Form 10-Q contains forward-looking statementswithin the meaning of the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995 including statements regarding the impact thatthe MLD process and i2000 oxygen implanter is expected to have on futurefinancial results, belief that in future years our business is more likely toinclude a growing component of equipment sales, the adoption by our customersof SIMOX-SOI technology in their mainstream manufacturing processes, theexpectation that gross margins on wafer product sales will increase as volumesand production yields improve, the continuation of fluctuations in revenue andresults of operations, the expectation that depreciation and amortization willcontinue to be a significant portion of expenses, the sufficiency of our capitalresources, and the anticipation of booking orders for one-to-three implantersthis fiscal year.  Such statements arebased on our current expectations and are subject to a number of factors anduncertainties which could cause actual results to differ materially from thosedescribed in the forward-looking statements. Such factors and uncertainties are referenced in the Company’s SECfilings from time to time, including, but not limited to those described aboveand in our Form 10-K for the year ended December 31, 2002. All information setforth in this Form 10-Q is as of the date of this Form 10-Q, and Ibisundertakes no duty to update this information, unless required by law.

 

**Effects Of Inflation**

 

Ibis believes that over the past three years inflation has not had asignificant impact on Ibis’ sales or operating results.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PARTI – ITEM 3**

 

**QUANTITATIVE****ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The exposure of market risk associated withrisk-sensitive instruments is not material to the Company, as the Company doesnot transact its sales denominated in other than United States dollars, investsprimarily in money market funds and short-term commercial paper, holds itsinvestments until maturity and has not entered into hedging transactions.

 

**PART II**

 

**OTHERINFORMATION**

 

 

Item 1 - LegalProceedings

None

Item 2 - Changesin Securities

None

Item 3 - Defaultsupon Senior Securities

None

Item 4 - Submissionof Matters to a Vote of Security Holders

None

 

Item 5 - OtherInformation

None

 

Item 6 - Exhibitsand Reports on Form 8-K

 
| (a)    | Exhibits  furnished as Exhibits hereto:                                                                                                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                   |
|   | **Exhibit No.**                                                                                                                                                                                                        |   | **Description** |
|   |                                                                                                                                                                                                                   |   |   |
|   | 31.1                                                                                                                                                                                                                   |   | Certification of  Martin J. Reid pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|   |                                                                                                                                                                                                                   |   |   |
|   | 31.2                                                                                                                                                                                                                   |   | Certification of  Debra L. Nelson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|   |                                                                                                                                                                                                                   |   |   |
|   | 32.1                                                                                                                                                                                                                   |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |                                                                                                                                                                                                                   |   |   |
| (b)    | Reports on Form 8-K:                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                   |
|   | The Company filed with the Securities and Exchange Commission on July  23, 2003 a Current Report on Form 8-K for the July 23, 2003 event announcing  its financial results for the Second Quarter ended June 30, 2003. |

 

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**IBISTECHNOLOGY CORPORATION**

 

**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                         | Ibis Technology Corporation |
|------------------------------|-----------------------------|
|                         |                        |
|                         |                        |   |
| Date: November 3, 2003       | By:                         |       /s/Debra L. Nelson |   |
|                         |                        | Debra L. Nelson |
|                         |                        | Chief Financial Officer, Treasurer and Clerk  (principal financial and accounting officer) |
|                         |                        |   |
|                         |                        |   |
| Date:  November 3, 2003 | By:                         |       /s/Martin J. Reid |   |
|                         |                        | Martin J. Reid |
|                         |                        | President and Chief Executive Officer |
|                              |                             |  |  |  |

 

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