**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark  One)** |
|-----------------|
|            |   |
| **ý**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|            |   |
|            | **For  the fiscal year ended December 31, 2002** |
|            |   |
| **o**           | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|            |   |
|            | **For  the transition period             to** |

** **

**Commission file number:  0-23150**

 

**IBIS TECHNOLOGY CORPORATION**

(Exact name of registrantas 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)                           |
|                                                                         |   |                                 |
| Registrant’s  telephone number, including area code: **(978) 777-4247** |
|                                                                         |
| Securities registered  pursuant to Section 12(b) of the Exchange Act:        |
| **None.**                                                                    |
|                                                                         |
| Securities registered  pursuant to Section 12(g) of the Exchange Act:        |
|                                                                         |
| **Common Stock, $.008 Par Value Per Share**                                  |
| (Title  of class)                                                            |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes     ý   No   o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.      ý

 

The aggregate market value of the registrant’s voting stock held bynon-affiliates of the registrant (without admitting that any person whoseshares are not included in such calculation is an affiliate) on March 3, 2003was $40,386,734 based on the last sale price as reported by the Nasdaq NationalMarket System.

 

As ofMarch 3, 2003, the registrant had 9,474,940 shares of common stock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Thefollowing documents (or parts thereof) are incorporated by reference into thefollowing parts of this Form 10-K: Certain information required in Part III ofthis Annual Report on Form 10-K is incorporated from the Registrant’s ProxyStatement for the Annual Meeting of Stockholders to be held on May 8, 2003.

 

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**PART I**

** **

**Item 1.   BUSINESS**

 

**Introduction**

 

Ibis TechnologyCorporation (“Ibis”) develops, manufactures and markets SIMOX-SOI implantationequipment and wafers for the worldwide semiconductor industry. SIMOX, whichstands for **S**eparation by **IM**plantation of **Ox**ygen, is a form ofsilicon-on-insulator, or SOI, technology that creates an insulating barrierbelow the top surface of a silicon wafer. Our proprietary oxygen implantersproduce SIMOX-SOI wafers by implanting oxygen atoms just below the surface of asilicon wafer to create a very thin layer of silicon dioxide between the thinoperating region of the transistor at the surface and the underlying siliconwafer itself.  The buried layer ofsilicon dioxide acts as an insulator for the devices fabricated on the surfaceof the silicon wafer and reduces the electrical current leakage which otherwiseslows integrated circuit performance and increases the loss of power duringcircuit operation.  Through this processour customers can produce integrated circuits, which we believe, offersignificant advantages over circuits constructed on conventional siliconwafers.  These advantages include:

 

•                  substantiallyimproved speed for microprocessors and other logic integrated circuits,

•                  reducedpower consumption,

•                  reducedsoft error rate, and

•                  highertemperature operation.

 

We believe thesecharacteristics make SIMOX-SOI wafers, and the finished integrated circuits,well-suited for many commercial applications, including:

 

•                  serversand workstations,

•                  portableand desktop computers,

•                  wirelesscommunications and battery powered devices such as laptop computers, personaldigital assistants and mobile phones,

•                  integratedoptical components, and

•                  harsh-environmentelectronics.

 

When we beganoperations in 1988, much of our revenue was derived from research anddevelopment contracts and sales of wafers for military applications. Over theyears, there was a shift in revenue to sales of SIMOX-SOI wafers for commercialapplications and the nature of our business has evolved through stages wheresometimes our revenues primarily resulted from selling wafers for evaluationpurposes, and sometimes our revenue was generated primarily from equipmentsales. This is a normal path to follow while developing and promoting afundamental new technology, especially when it relates to the semiconductorindustry embracing any change that affects fabrication operations. We believethat we are in the technology rollout stage of our corporate life cycle. Ourfundamental SIMOX-SOI technology has been developed, refined, and proven overthe last dozen years. In 2002, Ibis introduced the next-generationproduction-worthy SIMOX-SOI, which includes both the licensed modified low dose(“MLD”) wafer process and the i2000ä, an oxygen implanter, which is capableof producing eight and twelve inch (or 200 and 300 mm) SIMOX-SOI wafers. We aremarketing this implanter as the i2000. In 1999, we commenced a program todesign and develop the i2000, introduced it in March 2002 and began shipping300 mm wafers implanted from this machine shortly thereafter.  In September 2002, we received an ordervalued at approximately $8 million for an i2000 oxygen implanter from a majorsemiconductor manufacturer.  Thisimplanter was shipped to this customer in the last quarter of 2002, and isundergoing customer site acceptance.

 

Ibis has soldSIMOX-SOI wafers to most of the world’s leading commercial semiconductormanufacturers and foundries, including Advanced Micro Devices, Fujitsu, HewlettPackard, Honeywell, IBM, Intel, Mitsubishi Electric, Motorola, NationalSemiconductor, NEC, Philips, Samsung, Sharp, Texas Instruments, Toshiba, TSMCand UMC. In addition to semiconductor manufacturers, we also sell SIMOX-SOIwafers to several optical components manufacturers, including BookhamTechnology, Lightcross, Lucent,

 

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NTT and OKI Electric. We have also sold Ibis 1000 oxygen implanters toIBM, Sumitomo Mitsubishi Silicon Corporation (“SUMCO”) and Shanghai Simgui(“Simgui”).

 

Ibis believes that strategic alliances will play animportant role in developing a worldwide commercial market for our SIMOX-SOIwafers. We currently have material alliances or agreements with IBM, MEMCElectronic Materials, Inc. (“MEMC”), SUMCO and one other major silicon wafermanufacturer.

 

We were incorporated in Massachusetts in October 1987and commenced operations in January 1988. Our executive offices are located at32 Cherry Hill Drive, Danvers, Massachusetts 01923 and our telephone number is(978) 777-4247.

 

**Our Strategy**

 

Ibis’ primary goal is to be the dominant supplier ofoxygen implantation equipment to the world’s silicon wafer manufacturers sothey can, in turn, efficiently and cost-effectively supply SOI wafers to theglobal semiconductor industry. In the future we will continue to supply smallquantities of wafers for test and evaluation purposes, but our primary emphasiswill be on implanter sales and support. We also plan on continuing process development for SIMOX-SOIwafers.  Key elements of our strategyfor achieving this objective include:

 

**•**                  *Capitalizingon a Fundamental Trend in Semiconductor Manufacturing.* Gordon Moore,a founder of Intel, first articulated Moore’s Law, the semiconductor industry’stouchstone, in 1965.  It predicted thatthe number of transistors that can fit on a silicon chip would double every twoyears or so. This benchmark, which has proven to be incredibly accurate fornearly four decades, according to experts, is expected to hold true for atleast another decade, albeit at a slower pace. We expect that the globalsemiconductor industry will continue to seek new solutions to enhanceperformance and efficiency. Semiconductor manufacturers face an increasingdemand for faster integrated circuit speed, reduced power consumption, immunityto soft errors and smaller chip size. We believe that the industry is undergoinga shift from lithography to advanced materials (e.g., SOI, strained silicon)and structures (e.g., double gate transistors) to increase performance andcontrol energy consumption. In addition, as indicated in the InternationalTechnology Roadmap for Semiconductors, a respected industry guide, sponsored bythe Semiconductor Industry Associations, the industry is migrating towards muchthinner, more uniform silicon layers. By definition, an SOI wafer is composedof a layer of silicon on top of a layer of oxide.  Ultra-thin SOI wafers have been demonstrated to provide superiorresults especially in terms of increased power efficiency and heat reduction inthe manufacture of fully depleted substrate transistors for next generationsemiconductor devices. We believe SIMOX-SOI technology is a leading alternativeto address the need for increased power efficiency and heat reduction.  The trend towards thinner layers is anadvantage for Ibis because with our SIMOX process, thinner layers require lesstime to implant which nets higher output, lower costs and improvedquality.  We plan to focus on our majorkey customers in the semiconductor industry who we expect to lead the way inthe adoption of SIMOX-SOI technology. We plan to continue to focus a majorityof our technical and marketing resources on these key customers and to continueour joint development activities with all of our customers and strategicpartners.

 

•                  *Pursuing Strategic Marketing, Manufacturing,Distribution and Development Alliances.* We intend to continue topursue relationships through which third parties will distribute some of ourproducts and/or assist us in research and development activities. As evidenceof this strategy, we have entered into strategic alliances and/or jointdevelopment agreements with MEMC, SUMCO and an additional silicon wafermanufacturer, three of the largest silicon wafer manufacturers in the world. Wealso recently entered into an agreement with IBM to develop an enhanced,modified low-dose (MLD) process for the manufacture of SIMOX-SOI. In addition,we are pursuing the possibility of forming strategic partnerships withsemiconductor capital equipment manufacturers, additional silicon wafermanufacturers and suppliers of components for our machines. We also intend topursue partnerships

 

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or joint developmentarrangements that could give us the right to complementary technology and/orproducts.

 

•                  *Enhancing and Extending Current Product Offerings.*We intend to use our resources and our strategic partners’ technical expertiseto improve existing products, expand our core product functionality, addproducts to our existing product line and further advance our processtechnology. In 2001, we introduced AdvantoxÒMLD wafers, which are produced using a process licensed from IBM, and werecently entered into an agreement with IBM to develop an enhanced, MLD processaimed at producing lower-cost, higher quality SIMOX-SOI wafers with thinner topsilicon layers. In addition, in 2002 we introduced our next generation oxygenimplanter, the i2000, which includes 200 and 300 mm wafer size capability andenhancements to increase throughput and reduce production costs. We plan tocontinue to improve existing, and develop additional, SIMOX products.

 

•                  *IncreasingOur SIMOX-SOI Wafer and Implantation Equipment Manufacturing Capacity.*During 2002, we put in place a second line for 300 mm SIMOX wafer manufacturingwhich consists of balance-of-process (anneal, clean and metrology) equipment.We also began constructing three additional i2000 implanters, one of which wasshipped to a customer, and the others are expected to be sold or used forinternal wafer production.

 

**Marketing, Sales and Customers**

 

Over the last several years, Ibis has focused onintegrating SIMOX-SOI wafers into commercial applications that havesubstantially higher volume potential than military applications, which was ourinitial target market. In 2002, substantially all of our sales of SIMOX-SOIwafers were for commercial applications and a small number of our customersused our SIMOX-SOI wafers in commercial products. Many more of our customersare sampling SIMOX-SOI wafers or are developing prototype products.

 

Commercial shipments ofour wafers have been used principally for evaluation purposes or pilotproduction 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.

 

Each of these stages hasmany steps, and customers must evaluate each new wafer technology thatessentially lays a new foundation for substantially all other processes theyhave spent billions of dollars and decades of time developing.  Accordingly, it takes anywhere from 12 to 36months for a customer to proceed from initial sampling through R&D toinitial production, which is not unlike the standard process for qualifying anynew wafer material.  These steps applyeach time there is a change in the customer’s fabrication process, such as afeature-size change or new material. Ibis has a number of customers going through this process right now.

 

In February 2001, Ibisentered into an alliance with MEMC, pursuant to which MEMC became a globalsales representative for Ibis’ SIMOX-SOI wafers. MEMC has a worldwide presenceof approximately 100 sales and applications personnel located in sales officesaround the world. In addition, MEMC operates manufacturing facilities directly,or through joint ventures, in Italy, Japan, Malaysia, South Korea, Taiwan andthe United States. We believe that MEMC’s proven technology leadership and 300mm capability will build upon the foundation established by us to promote theacceptance of our SIMOX products and the future adoption of 300 mm SIMOX.

 

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Our internal salespersonnel generally focus on our largest customers, optical components and MicroElectroMechanicalSystems (“MEMS”) manufacturers, wafer manufacturers, as well as supporting ourstrategic partners. Our objective in these broad-based sales efforts is topromote the adoption of SIMOX-SOI technology on an industry-wide basis.

 

Overseas, we rely on our strategic partners, MEMC andSUMCO, to market and sell our wafer products. We also have a SIMOX implantersales representation agreement with IRAM Systems Co., Ltd, a Koreancorporation, to solicit orders for our Ibis 1000 implanters from customerslocated in China.

 

The following table setsforth, in thousands of dollars, the amount of revenue derived from oursignificant customers during the fiscal years ended December 31, 2000, 2001 and2002, as well as the percent of our revenue represented by these customers’purchases:

 
|         |   | **2000**    |   | **2001**    |   | **2002**    |   |
|--------------|--------|-------------|--------|-------------|--------|-------------|--------|
| **Customer** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   |
| IBM          |   | $           | 5,725  |        | 40     | %           | $      | 806 |   | 11 | % | $ | 4,632 |   | 33 | % |
| SUMCO        |   | 1,045       |   | 7           | %      | 1,288       |   | 17 | % | 172 |   | 1 | % |
| Bookham      |   | 5,604       |   | 39          | %      | 2,097       |   | 28 | % | 947 |   | 7 | % |
| Simgui       |   | —      |   | —      |   | —      |   | — |   | 5,555 |   | 40 | % |
|              |        |             |        |             |        |             |        |  |  |  |  |  |  |  |  |  |

 

The sales to IBM in 2000resulted primarily from the sale of an Ibis 1000 oxygen implanter at a saleprice of approximately $4,000,000. The sale to Simgui in 2002 also representsthe sale of an Ibis 1000 oxygen implanter and parts.

 

The growth of MEMS andoptical device marketplaces has created new market opportunities formanufacturers of SIMOX-SOI wafers. Companies such as Bookham, Lightcross,Opticnet and NTT are developing devices in silicon such as optical switches,multiplexers and attenuators.  Webelieve the tight silicon uniformity that SIMOX provides makes it well suitedfor these types of applications.

 

Customers of Ibis thatpurchase wafers for military applications are reliant in part on governmentfunding, primarily from the Department of Defense. During the fiscal years2000, 2001 and 2002, approximately 5%, 8%, and 1%, respectively, of our productsales were generated by product sales to such customers.

 

Sales to overseascustomers in 2000, 2001 and 2002 were 47%, 52% and 56% of total revenue,respectively. In 2000, 2001 and 2002 sales to the United Kingdom were 39%, 28%and 7%**,** respectively, of totalrevenue, most of which was attributable to Bookham Technology.  In 2002, sales to China were 40% of totalrevenue, which was attributable to Simgui.

 

**StrategicAlliances**

 

Ibis has entered into anumber of strategic alliances which we believe enable us to better address ourtarget market, to advance our technology more effectively, and to match ourtechnical developments and production expansion to the needs of our keycustomers.

 

We have a long-standingrelationship with SUMCO which began as a sales distribution arrangement,progressed to a joint research and development effort and ultimately SUMCOpurchased an Ibis 1000 oxygen implanter in order to establish a Japanese-basedmanufacturing facility for SIMOX-SOI wafers. This implanter had been operatingat our Danvers facility, but was installed in SUMCO’s wafer manufacturingfacility in Chiba, Japan in July 2001. In 1999, we completed an agreement tolicense our standard and Advantox SIMOX-SOI wafer fabrication process toSUMCO.  Under this agreement we receivedan initial royalty fee and are entitled to future royalties based on apercentage of SUMCO’s SIMOX-SOI wafer sales.

 

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In January 2003, weannounced the signing of a Joint Development Agreement with IBM. The objectiveof the agreement is to develop an enhanced, modified low-dose (MLD) process forthe manufacture of SIMOX-SOI wafers, which are used as the starting material inthe manufacture of advanced integrated circuits (ICs). Aimed at producinglower-cost, higher quality SIMOX-SOI wafers with thinner top silicon layers,the joint development work is being conducted at both Ibis and IBM. We believethat both companies bring extensive expertise and experience regardingSIMOX-SOI technology to the joint effort. IBM, a pioneer in the development andadoption of SOI technology, developed the original MLD process for highquality, low cost SIMOX-SOI wafers. IBM then licensed Ibis to manufactureSIMOX-SOI wafers using the production-proven MLD process for sale to IBM andall other Ibis customers. A complementary product to our existing Advantoxproduct line, Advantox MLD wafers are being broadly marketed to integratedcircuit manufacturers looking to accelerate their SOI adoption process.

 

Since 2001 MEMC has beena global sales representative for our entire SIMOX-SOI wafer product line,including Advantox MLD, and the primary supplier to us of silicon substratematerial. In February 2002, Ibis and MEMC expanded this alliance by enteringinto a Technical Cooperation Agreement aimed at developing advanced SIMOX-SOIwafers for semiconductor manufacturers worldwide. The priorities of thealliance include boosting device performance and fab yield through defectdensity improvement in the device layer using optimized wafers such as MEMC’sOPTIATM product, and accelerating the industry’s adoption of Ibis’ SIMOX-SOIproducts.  The alliance also grants MEMCthe right to license our SIMOX-SOI wafer technology and to purchase oxygenimplanters manufactured by us. Such rights are designed to provide MEMC withthe option to produce and sell SIMOX-SOI wafers at some point in the future.

 

**Researchand Development**

 

Ibis has active researchand development programs in both equipment and wafer process technology. Forthe past two years a primary focus has been developing capacity to produce 300mm SIMOX wafers. This required the development of a next-generation oxygen implanter,the i2000, and the procurement and qualification of annealing, cleaning, andmetrology tools for balance of process at 300 mm.

 

The proprietary i2000 wasdesigned to support the volume production of high quality SIMOX-SOI 200 and 300mm wafers for the global semiconductor industry. We began shipping 300 mm SIMOXwafers in early 2002. The i2000 duplicates the process environment of the Ibis1000 to minimize process risks; however, it incorporates a number of featuresto improve throughput and reduce costs. These include increased beam current,faster wafer handling, off-hub wafer cooling, and modular construction, whichwe believe will enable improved serviceability and diagnostics, whilesimplifying the assembly and shipping of the machine. The simpler beam linedesign of the i2000 also offers extensive capabilities, facilitating themanufacture of the Advantox product portfolio. Taken together, these featuresincrease productivity of the i2000 over the Ibis 1000 by a factor greater thantwo.  Finally, the i2000 is far more fabfriendly than the Ibis 1000. It is designed to be bulkhead mounted in the cleanroom, offers front-opening unified pod (FOUP) capability and meets all SEMIsafety and ergonomic guidelines. We also believe that the i2000’s improvedautomation and operator-friendly controls will improve product yield and affordease-of-use.

 

Wafer technology R&Dhas concentrated on enhancing the range of potential commercial applicationsfor Ibis’ SIMOX-SOI wafers by:

 

•                                          Refiningtechniques to produce SIMOX-SOI wafers of higher quality;

•                                          Developingnew processes to produce SIMOX-SOI wafers with thinner top silicon and buriedoxide layers at lower cost, to a large extent expanding and improving the MLDprocess;

•                                          Jointlydeveloping a technology for manufacturing high resistivity SIMOX-SOI wafers formixed signal and radio frequency (“RF”)applications with a major silicon wafermanufacturer. With this alliance, we hope to develop advancements in SIMOXwafer manufacturing, including reduced wafer cost, scalability to 300 mm andstability of the material’s high resistivity characteristic through thermalcycling common in integrated circuit manufacturing. Samples of the developed

 

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high resistivity SIMOX wafers have been successfullyproduced and introduced to a major RF semiconductor manufacturer;

•                                          Integratingstrained silicon (another emerging wafer-materials technology) with SOI (SSOIwafers), which is widely seen as an innovation enabling a further significantboost of complementary metal oxide semiconductor (“CMOS”) device speed.Improved electron mobility in strained silicon leads to an increased drivecurrent in MOS devices and is complemented by benefits provided by SOI, such asreduction of parasitic capacitances in CMOS devices. In 2002, IBM announcedthat SSOI wafers are expected to be integrated into advanced IC technologiesstarting with 65 nm node and will be adopted for high volume manufacturing in2005-2006. Ibis maintains an active R&D program targeting development ofSSOI SIMOX wafers with goals and milestones aligned with the roadmaps of ourkey customers; and

•                                          Respondingto specific customer requirements and emerging industry trends, such as thedevelopment of our Advantox MLD-UT (ultra thin) product line to addressrequirements for Fully depleted devices. Fully depleted is a MOS transistorstructure in which the depletion region under normal operation extends as faras a buried insulator layer. We believe that ultra-thin SOI wafers providesuperior results, especially in terms of increased power efficiency and heatreduction in the manufacture of fully depleted substrate transistors for nextgeneration semiconductor devices.

 

During the fiscal years ended December 31, 2000, 2001and 2002, Ibis’ internally funded research and development expenses wereapproximately $4,586,000, $5,119,000 and $6,258,000, or 32%, 69% and 45% of ourrevenues, respectively.

 

Government sponsored research and developmentactivities also comprise a part of our research and development effort.SIMOX-SOI technology is important to various government agencies in large partdue to its utility in constructing high performance, radiation-tolerant andhigh temperature defense and space-based systems. During the fiscal years ended2000, 2001 and 2002, revenues from government sponsored research anddevelopment contracts were approximately $372,000, $212,000 and, $130,000, or3%, 3% and 1% of our revenues, respectively. Research and development expenses attributable to research contracts areexpensed as incurred and included in the cost of contract revenue.

 

Government-sponsored research and development hasfocused on improving SIMOX-SOI manufacturing and characterization methods anddeveloping new processes to ensure the availability of high quality SIMOX-SOIwafers which meet the requirements for commercial and military applications.The Small Business Innovative Research, or SBIR, program, which is the largestsource of direct government support to us, has funded development of advancedmethods of SIMOX-SOI processing, resulting in improved fabrication andcharacterization of SIMOX-SOI materials, and the SBIR has been supportive indeveloping a fundamental understanding of new processes which has been usefulin new product development.  We havereceived SBIR contracts from ARPA, the Ballistic Missile Defense Organization,the Defense Special Weapons Agency, U.S. Army, the U.S. Air Force, theDepartment of Energy, National Science Foundation, National Aeronautical andSpace Administration and the Strategic Defense Initiative Organization.

 

Contracts with government agencies require compliancewith applicable government regulations and are generally subject to competitivebidding, extensive regulation and cancellation at the government’s solediscretion. Pursuant to the terms of such government contracts, we will berequired to grant to the U.S. government a royalty-free nonexclusive worldwidelicense to any inventions claimed by us which were funded by the U.S.government. Additionally, these agreements are subject to negotiated overheadrates, and work performed under government contracts is subject to audit andretroactive adjustments of amounts paid to us.

 

**Competition**

 

We believe we face three general sources of competition:(1) direct SIMOX-SOI competition, (2) competing SOI technologies, and (3)competing non-SOI technologies. Among direct SIMOX-SOI competitors, we believewe are presently the only U.S. manufacturer of SIMOX-SOI wafers. SUMCO ismanufacturing SIMOX wafers in Japan on Ibis 1000 implanters. Wacker Siltronic’sjoint venture with Nippon Steel Corporation, Wacker Nippon Steel Corporation(“WNC”), has decided to enter production of 200 mm

 

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SIMOX technology to meet rising demand from its global customer base.WNC is also continuing development of 300 mm SIMOX manufacturing technologyfrom Nippon Steel Corporation. Komatsu is also marketing SIMOX-SOI material. Webelieve that, at this stage of the market’s development, the availability ofalternate sources of SIMOX-SOI wafers will help address customer concerns aboutthe lack of available alternate sources of supply. In addition, we believethese companies could be potential equipment customers of ours.

 

The first generation oxygen implanter, the NV-200, wasproduced by Eaton Corporation (now known as Axcelis), which built a total ofsix implanters. Of these six implanters, we owned two, which were removed fromproduction in 1997. We believe that the remaining machines are being used forresearch, if at all, as opposed to commercial production of SIMOX wafers. In1995, Hitachi began marketing an oxygen implanter and has also developed anoxygen implanter capable of producing 300 mm wafers. During 2002, a major semiconductormanufacturer chose our tool after exhaustive evaluation. We believe that thispurchase was based on the i2000’s ability to produce high quality, 300 mm, thinSOI wafers, reliably and cost-effectively. To our knowledge, Hitachi hasshipped one 300 mm oxygen implanter to a Japanese wafer manufacturer. We arenot aware of plans by any of the major ion implant manufacturers to design anddevelop oxygen ion implanters, but they may develop plans in the future.  It is our belief that it would take at leasttwo years to develop such an implanter.

 

The second sourceof competition for us is the development of alternative SOI materials. Theapproach that competes with SIMOX is thin-film bonded SOI wafers. SOITEC, aFrench-based company that spun off from LETI, a French government research lab,uses a bonded method. SOITEC has, to date, been our major wafer productcompetitor and has sold larger volumes of SOI wafers than us. The thin-filmbonded approach uses two silicon wafers, one or both having a thermally-grownoxide layer, which are first bonded together to form the silicon/silicondioxide/silicon structure. A majority of one of the wafers is removed orseparated from the double-wafer structure, and the remaining portion serves asthe device layer of the SOI wafer. The most popular method is to transfer thethin layer using wafer splitting techniques, allowing the rest of the wafer tobe reclaimed and reused. Regions of stress are first created using implantationand/or epitaxial growth. The wafer is split along the stress interface by theapplication of heat (SOITEC’s Smartcut® process), a gas jet (Silicon Genesis’process), or a water jet (Canon’s ELTRAN® process).  Evidence to date suggests that both SIMOX and bonded wafersperform equally well. Ibis believes, however, that the SIMOX process results ina lower manufacturing cost. Ibis believes that, at this stage in the market’sdevelopment, multiple SOI suppliers will help accelerate the adoption of SOItechnology.

 

The third source of competition is derived fromalternative non-SOI technologies designed to obtain benefits similar to thoseof SOI, including improvements to existing technologies. Significant resourcesare continually expended to improve epitaxial and conventional silicon wafers.

 

The semiconductor industry has demonstrated itsresourcefulness in improving these materials through creative circuit designand manufacturing techniques, thereby extending the useful life of conventionalsubstrates, and we cannot be sure that it will not continue to do so. Therelatively lower cost of these substrates provides an incentive to thesemiconductor industry to continuously improve existing material without movingto new, more advanced substrates. In addition, complex variations of moreconventional approaches, such as elaborate circuit structures built onconventional silicon substrates, and compound materials (silicon-germanium,gallium-arsenide, indium phosphide, etc.), are other alternative substratechoices. Strained silicon is a technology that can be used to increase theoperating speed of computer chips, such as microprocessors. Starting with aconventional silicon wafer, a thin layer of a material such as silicongermanium (SiGe) is added, then a very thin layer of silicon is added on top.The atoms in the top silicon layer tend to align themselves with the morewidely spaced atoms in the underlying layer. The result is that the spacingbetween Si atoms is stretched -or strained - farther apart, allowing electronsto flow with up to 70 percent less resistance, leading to chips that are up to35 percent faster, as reported by IBM. The fact that strained silicon is anemerging wafer-materials technology raises questions about how it compares toSOI, another emerging wafer-materials technology. Although both strainedsilicon and SOI are wafer-materials technologies that can increase chip speed,they work in different - and complementary - ways and if combined can provideadditional benefits.

 

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Strained silicon increases transistor speed byincreasing the mobility of electrons traveling through the top silicon. On theother hand, SOI increases transistor speed by reducing parasitic capacitancesassociated with source and drain junctions. So, strained silicon and SOI arecomplementary and mutually enhancing - not competing - technologies. Perhapsmost importantly, SOI can significantly reduce power consumption. Strainedsilicon does reduce power consumption somewhat, but nowhere near the degree towhich SOI can provide this vital benefit. SOI also provides additionaltransistor performance benefits by enabling the fully depleted MOS devicearchitecture. We believe the real wave of the future will be combining thesetwo complementary technologies, much like the way copper interconnects, low kdielectric materials and SOI substrates have been combined.

 

**Backlog**

 

Ibis’ backlog consists of written orders for SIMOX-SOIwafers expected to be delivered during 2003, equipment revenue expected to berecognized during 2003 and other contracts expected to be performed during2003.  The backlog is as follows:

 
|                     |   | **As of February 28,** |      |
|--------------------------|--------|------------------------|-----------|
|                     |   | **2002**               |      | **2003** |   |
|                     |   | **Dollars**            |      | **Percent** |   | **Dollars** |   | **Percent** |   |
| Wafer orders:            |   |                   |      |   |   |   |   |   |   |
| 100 mm                   |   | $                      | 21,000    |   | 1 | % | $ | 44,000 |   | 1 | % |
| 150 mm                   |   | 11,000                 |      | — |   | 28,000 |   | — |   |
| 200 mm                   |   | 952,000                |      | 41 | % | 183,000 |   | 2 | % |
| 300 mm                   |   | 1,365,000              |      | 58 | % | 7,913,000 |   | 97 | % |
| Total wafer orders       |   | $                      | 2,349,000 |   | 100 | % | $ | 8,168,000 |   | 100 | % |
| Equipment related orders |   | $                      | 5,798,000 |   |   |   | $ | 8,054,000 |   |   |   |
| Contracts/service        |   | $                      | 450,000   |   |   |   | $ | 688,000 |   |   |   |

 

Approximately 98% of the wafer backlog is comprised oforders from one customer of Ibis. All customer orders are subject tomodification or cancellation by the customers. Backlog can fluctuate greatlybased upon, among other matters, the timing of receipt of orders, especiallyequipment orders. Therefore, variations in backlog may not represent a fairindication of future business trends.

 

**Patentsand Proprietary Rights**

 

During 2002, Ibis added four patents to itsintellectual property portfolio and we have more than two-dozen patents pendingrelating to the SIMOX fabrication process or our proprietary i2000 oxygenimplanter.

 

Ibis has an exclusive worldwide sublicense to theproprietary beam scanning system developed and patented by a consultant to usduring the development of the Ibis 1000. Our beam scanning system sublicenseagreement also grants us certain rights to further sublicense the beam scanningsystem for certain applications other than oxygen implantation. Pursuant tothese rights, we have entered into four non-exclusive sublicense agreementsthat permit the respective sublicensees to manufacture, use and sellimplantation machines incorporating the beam scanning system so long as suchmachines are not designed for the production of oxygen implanted wafers. Eachsublicensee has paid us a non-refundable option fee upon signing an agreementand an initial license fee when it exercised its option to use the licensedtechnology. In addition, each sublicensee will pay a royalty fee with respectto each implantation machine manufactured, used or sold after its option feeand initial license fee has been applied. License fees received by us fromsublicenses are to be shared on a substantially equal basis with the licensorof the beam scanning system. As of December 31, 2002, Ibis had receivedapproximately $1,452,000 in net license fees, after deducting amounts paid tothe licensor.

 

Ibis also obtained an exclusive license to technologythat facilitates the presentation of wafers to ion beams developed by SuperionLimited, a United Kingdom corporation. Through December 31, 2002, Ibis has paid$537,000 for license fees for Ibis 1000 implantation machines that have beenmanufactured by us.  Under the terms ofthis agreement, Superion Limited has retained the right to utilize thetechnology for uses not

 

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involving oxygen implantation of silicon or other semiconductormaterials.  During 2001, this agreementwas modified to incorporate i2000 implantation machines. Ibis also entered intoa Sublicense Agreement during 2001 which gives our customer a royalty-bearing,non-exclusive license to utilize this technology for ion implantation machines,excluding oxygen implanters.

 

During 1998, we entered into an equipment licensingand development agreement which gives the customer the right to aroyalty-bearing, non-exclusive license to supplement our equipmentmanufacturing capacity.  We havereceived no royalties under this agreement.

 

During 1999, we completed an agreement to license itsstandard and Advantox SIMOX-SOI wafer fabrication process to SUMCO. Theagreement consisted of an initial royalty fee. Future royalties shall bepayable based on a percentage of SUMCO’s SIMOX-SOI wafer sales.

 

In 2000, we licensed from IBM the right to manufactureand sell SIMOX-SOI wafers, using IBM’s proprietary SIMOX process, to IBM and toall our other customers. Under the royalty-bearing license agreement, we mayuse IBM’s process to produce SIMOX-SOI wafers which we market as Advantox MLD.A complementary product to our existing Advantox product line, Advantox MLDwafers are broadly marketed to integrated circuit manufacturers looking toaccelerate their SOI adoption process. Under the agreement we granted IBM rights to our patents utilized in themodified low dose, or MLD process.

 

During 2001, we licensed our Advantox 50 and 150 SIMOXwafer fabrication processes to Simgui. Ibis received the initial license feefrom Simgui in January 2003, and the technology transfer is expected to takeplace in the first quarter of 2003.

 

Although we own or have exclusive rights to severalpatents and several pending applications, and we diligently monitor theresearch and development process to identify inventions which warrant pursuingpatent protection, we rely largely upon trade secret protection to safeguardour proprietary technology. All of our employees are currently required toexecute confidentiality agreements pursuant to which they agree to assign to usall patent rights and technical or other information developed by the employeesduring their employment with us, and agree not to disclose any trade secret orconfidential information without our prior written consent. Notwithstandingthese confidentiality agreements, we cannot be sure that other companies willnot acquire information which we consider to be proprietary. Moreover, wecannot be sure that our patent rights will be enforceable or provide us withmeaningful protection from competitors or that patent applications will beallowed. Even if a competitor’s products were to infringe patents owned orlicensed by us, it would be very costly for us to enforce our rights in anenforcement action, which would also divert funds and resources which otherwisecould be used in our operations. We cannot be sure that we would be successfulin enforcing such rights, that our products or processes do not infringe thepatent or intellectual property rights of a third party, or that if we are notsuccessful in a suit involving patents or other intellectual property rights ofa third party, that a license for such technology would be available, if atall, on commercially reasonable terms.

 

Pursuant to the terms of our government contracts,Ibis will be required to grant to the U.S. government a royalty-freenon-exclusive worldwide license to any inventions claimed by us which werefunded by the U.S. government.

 

**GovernmentRegulation**

 

Ibis has entered into certain research and developmentcontracts with agencies of the United States government which requirecompliance with applicable government regulations. These contracts aregenerally subject to competitive bidding and extensive regulation and aregenerally subject to cancellation at the U.S. government’s sole discretion.

 

Ibis is subject to a variety of federal, state andlocal environmental regulations related to the storage, treatment, discharge ordisposal of chemicals used in its operations and exposure of our personnel tooccupational hazards. Although we believe that we have all permits necessary toconduct our business, the failure to comply with present or future regulationscould result in fines being imposed on us, suspension of

 

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production or a cessation of operations. Our future activities mayresult in our being subject to additional regulations. Such regulations couldrequire us to acquire significant equipment or to incur other substantialexpenses to comply with regulations. Any failure by us to control the use of,or to restrict adequately the discharge of, hazardous substances or to properlycontrol other occupational hazards could subject us to substantial financialliabilities.

 

Certain technologies associated with Ibis’ implantersare subject to export regulations administered by the U.S. Department ofCommerce.  Accordingly, Ibis may berequired to secure U.S. export licenses with respect to sales of implanters ortransfers of technologies to end users in certain foreign countries. There canbe no assurance that if necessary, Ibis will be able to secure such licenses ina timely manner, or at all.

 

**Manufacturingand Supplies**

 

Ibis manufactures its oxygen implanters from standardcomponents and from components manufactured in-house or by other vendorsaccording to our design specifications. Most raw materials and components notproduced by us are available from more than one supplier. However, certain rawmaterials, components and subassemblies are obtained from a limited group ofsuppliers. Although we seek to reduce our dependence on these limited sourcesuppliers and we have not experienced significant production delays due tounavailability or delay in procurement of component parts or raw materials todate, disruption or termination of certain of these sources could occur andsuch disruptions could have a material adverse effect on our business andresults of operations.

 

We manufacture our SIMOX-SOI wafers using conventionalsilicon wafers and a variety of chemicals and gases, all of which are availablefrom multiple sources. We order the chemicals and gases pursuant to blanketpurchase orders which generally may be modified or cancelled by us upon 60days’ prior notice to the vendor.  In2001, Ibis and MEMC, a leading global producer of silicon wafers, entered intoan alliance pursuant to which MEMC became our primary supplier of siliconsubstrate material.  In periods ofincreasing demand in the semiconductor industry for silicon wafers, we cannotbe sure that we will be able to purchase an adequate supply of such siliconwafers for manufacture of our products at or near current prices, if atall.  Any shortages in the availabilityof silicon wafers or a significant increase in the price of silicon waferscould have a material adverse effect on our business and results of operations.

 

**Employees**

 

As of December 31, 2002, we employed 109 persons on afull-time basis and one person on a permanent part-time basis. None of ouremployees are represented by a labor union and we believe our relations withour employees are good.

 

**RiskFactors**

 

***The Commercial Market for SIMOX-SOI Technology is StillDeveloping and May Never Fully Develop.***

 

The sources of ourrevenue have shifted from primarily research and development contracts andsales of SIMOX-SOI wafers for military applications to primarily sales ofSIMOX-SOI wafers for commercial applications and sales and support of oxygenimplantation equipment. To date, most customers who have purchased ourSIMOX-SOI wafers in the commercial field have done so for the purpose ofcharacterizing and evaluating the wafers and developing prototypes. We areaware of only four commercial manufacturers that are using SIMOX-SOI wafers inlow volume production for a limited number of products. The performanceadvantages of SIMOX-SOI wafers may never be realized commercially and acommercial market for SIMOX-SOI wafers may never fully develop. The failure ofmajor semiconductor manufacturers to adopt SIMOX-SOI technology would adverselyaffect, and may prevent, the widespread adoption of this technology by others.

 

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***We Rely Heavily on Sales to Certain Significant Customers,Which May Vary Significantly From Quarter to Quarter Causing Our OperatingResults to Fluctuate.***

 

We derive a large portion of our sales of both wafersand wafer manufacturing equipment from certain significant customers. Thefollowing table sets forth, in thousands of dollars, the amount of revenuederived from our significant customers during the fiscal years ended December31, 2000, 2001 and 2002, as well as the percent of our revenue represented bythese customers’ purchases:

 
|         |   | **2000**    |   | **2001**    |   | **2002**    |   |
|--------------|--------|-------------|--------|-------------|--------|-------------|--------|
| **Customer** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   |
| IBM          |   | $           | 5,725  |        | 40     | %           | $      | 806 |   | 11 | % | $ | 4,632 |   | 33 | % |
| SUMCO        |   | 1,045       |   | 7           | %      | 1,288       |   | 17 | % | 172 |   | 1 | % |
| Bookham      |   | 5,604       |   | 39          | %      | 2,097       |   | 28 | % | 947 |   | 7 | % |
| Simgui       |   | —      |   | —      |   | —      |   | — |   | 5,555 |   | 40 | % |
|              |        |             |        |             |        |             |        |  |  |  |  |  |  |  |  |  |

 

The sales to IBM in 2000resulted primarily from the sale of an Ibis 1000 oxygen implanter at a saleprice of approximately $4,000,000.  Thesale to Simgui in 2002 also represents the sale of an Ibis 1000 oxygenimplanter and certain parts.  Ibisexpects that we will continue to rely on a relatively small number of customersas sources of revenue in the foreseeable future.  The loss of one or more of these major customers and our failureto obtain other sources of revenue could have a material adverse impact on ourbusiness.  In addition, any downturn inthese customers’ business or the industry in which these customers operatecould result in a significant decrease in sales of our products to thesecustomers, which would have an adverse effect on our business.

 

***We Have Significant Losses and May Never Be Able to SustainProfitability.***

 

We experienced net lossesof $1,501,867, $9,594,919 and $14,096,179 in 2000, 2001 and 2002,respectively.  As of December 31, 2002,we had an accumulated deficit of $40,421,825. Net losses may continue for theforeseeable future. Although we have had profitable periods from time to time,we may not be able to achieve sustained profitability.

 

***We Expect Our Quarterly Revenue and Operating Results toFluctuate Significantly.***

 

We anticipate thatour revenue and operating results are likely to vary significantly from quarterto quarter in the future, and it is likely that in future quarters ouroperating results may be below the expectations of public market analysts orinvestors.  If this occurs, the price ofour common stock will likely decrease. Customers in the semiconductor industry tend to order large quantitiesof wafers on an irregular basis. This means that customers who account for asignificant portion of our net revenue in one quarter may not place any ordersin the succeeding quarter or quarters. These ordering patterns may result insignificant quarterly fluctuations in our revenue and operating results. Inaddition, because we do not sell implanters on a regular basis, the recognitionof revenue from the sale of even one implanter is likely to result in asignificant increase in the revenue for that quarter.  A number of other factors, many of which are discussed in moredetail in other risk factors, may also cause variations in our results ofoperations, including:

•              cancellations of orders andshipment delays and rescheduling;

•              our wafer manufacturing capacity andyields;

•              new product introductions, whichoften result in a mismatching of research and development expenses andrecognition of revenue;

•              the success of our marketingalliances; and

•              economic conditions and capitalspending in the semiconductor industry and in other industries in which ourcustomers operate.

 

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A high percentage of ourexpenses are essentially fixed in the short term. As a result, if we experiencedelays in generating and recognizing revenue, our quarterly operating resultsare likely to be seriously harmed. Due to these and other factors, we believethat quarter-to-quarter comparisons of our operating results will not bemeaningful. You should not rely on our results for one quarter as anyindication of our future performance.

 

***Competitors and Competing Technologies May Render Some orAll of Our Products or Future Products Noncompetitive or Obsolete; PotentialMaterial Write-down for Impaired or Obsolete Assets.***

 

The semiconductor industryis highly competitive and has been characterized by rapid and significanttechnological advances. A number of established semiconductor and materialsmanufacturers, including certain of our customers, have expended significantresources in developing improved wafer substrates. Our competitors or others,many of which have substantially greater financial, technical and otherresources than we do, may succeed in developing technologies and products thatare equal to or more effective than any which we are developing, which couldrender our technology obsolete or noncompetitive. In addition to competitionfrom other manufacturers of SIMOX-SOI wafers, we face competition frommanufacturers using bulk silicon and epitaxial wafer technology, compound materialstechnology such as silicon-germanium, gallium-arsenide and indium phosphide andSOI technology other than SIMOX technology. Although we believe that SIMOX-SOIwafers offer integrated circuit performance advantages, semiconductormanufacturers may develop improvements to existing bulk silicon, epitaxial orstrained silicon wafer technology, and competing compound materials or SOItechnologies may be more successfully developed, which would eliminate ordiminish the performance advantages of SIMOX-SOI wafers. Also, if semiconductormanufacturers fail to adopt SIMOX technology during the current process cycle(such cycles typically last two to three years) or transition to the 300 mmwafer size sooner than we anticipate, our 200 mm and smaller wafer productionline may become obsolete and we would be required to reduce our income by animpairment loss which could be material. Although we are aware of only oneother company manufacturing oxygen implant equipment, other major semiconductorimplant equipment manufacturers could develop a less expensive oxygen implanterwith superior technology. Our ability to compete with other manufacturers ofsemiconductor implanters, SIMOX wafers and manufacturers of competing SOIwafers, as well as with bulk silicon, epitaxial, strained silicon and compoundmaterials wafer manufacturers, will depend on numerous factors within andoutside our control, including:

 

•      the successand timing of our product introductions and those of our competitors;

•      productdistribution;

•      customersupport;

•      sufficiencyof funding available to us; and

•      the price,quality and performance of competing products and technologies.

 

***We Must Continually Improve Existing Products, Design andSell New Products and Manage the Costs of Research and Development in Order toCompete Effectively.***

 

The semiconductorindustry is characterized by rapid technological change, evolving industrystandards and continuous improvements in products and required customerspecifications. Due to the constant changes in our markets, our future successdepends on our ability to improve our manufacturing processes, improve existingproducts and develop new products. For example, our oxygen implanters mustremain competitive on the basis of cost of ownership, process performance andevolving customer needs. To remain competitive we must continually introduceoxygen implanters with higher capacity, better production yields and theability to process larger wafer sizes.

 

The commercialization ofnew products involves substantial expenditures in research and development,production and marketing. We may be unable to successfully design ormanufacture these new products and may have difficulty penetrating newmarkets.  Because it is generally notpossible to predict the amount of time required and the costs involved inachieving certain research, development and engineering

 

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objectives, actual development costs may exceed budgeted amounts andestimated product development schedules may be extended. Our business may bematerially and adversely affected if:

 

•      we are unableto improve our existing products on a timely basis;

•      our newproducts are not introduced on a timely basis;

•      we incurbudget overruns or delays in our research and development efforts; or

•      our newproducts experience reliability or quality problems.

 

***Our SIMOX-SOI Wafer Products are Difficult to Manufactureand Small Manufacturing Defects Can Adversely Affect Our Customers’ and Our OwnProduction Yields and Our Operating Results.***

 

The manufacture of ourSIMOX-SOI wafers is a highly complex and precise process. SIMOX-SOI waferproduction requires a tightly controlled, clean environment. Very smallimpurities in our manufacturing materials or process, contamination of themanufacturing environment and/or equipment failures can cause wafers to berejected, can adversely affect our customers’ manufacturing yields of theirintegrated circuits or can cause shipping delays. Our customers or we mayexperience problems in achieving an acceptable yield in the manufacture ofSIMOX-SOI wafers, and the risk of encountering difficulties increases as wetransition to new manufacturing methods or more exacting customerspecifications. In the past, we have experienced difficulties in meetingevolving customer specifications which have led to delayed SIMOX-SOI wafershipments and/or increased production costs.

 

***The Customer Qualification Process for Our Wafer Products isComplex and Lengthy.***

 

Our customers expendsignificant efforts in evaluating and qualifying our wafer products before theyplace significant orders with us.  Todate, commercial shipments of our wafers have been used principally forevaluation purposes or pilot production in products by our customers. The timeto develop an integrated circuit on SIMOX-SOI is lengthy, sometimes takingtwelve to thirty-six months. The cycle typically goes from initial sampling ofSIMOX-SOI wafers to more intensive sampling, the manufacture of prototypeintegrated circuits, circuit process modifications, yield optimization, pilotproduction and finally, production. This is a normal cycle in the semiconductorindustry for any new advanced material such as Ibis’ SIMOX-SOI.  Even after this lengthy qualificationprocess, customers may not purchase our products in substantial amounts, or atall.  This lengthy sales cycle, as wellas the practice of semiconductor manufacturers to place sporadic orders, maycause our revenue and operating results to vary significantly and unexpectedlyfrom period to period.

 

***The Manufacturing and Customer Qualification Process for OurImplanters is Complex, Lengthy and Costly.***

 

In the semiconductorindustry customers regularly require equipment manufacturers to qualify theequipment at the customer’s site. The time required to customer qualify animplanter at a customer’s site is very difficult to predict because thequalification process for each of our implanters is complex, lengthy andcostly. The manufacturing and qualification process for each implanter requiresus to construct and customer qualify the machine at our premises, disassemblethe machine for transportation, and reassemble and requalify it at thecustomer’s premises. During this qualification period, we invest significantresources and dedicate substantial production and technical personnel toachieve acceptance of the implanter. Each customer will not accept theimplanter until it has successfully produced wafers to exact specifications atthe customer’s premises. Even very small differences in the customer’senvironment or initially imperceptible changes that may occur to the implanterduring the transportation to and reassembly of the implanter at the customer’ssite can cause a large percentage of wafers produced by the implanter to berejected, which would delay the acceptance of the implanter by the customer.Historically, we have experienced delays in achieving customer acceptance.Delays or difficulties in our manufacturing and qualification process couldincrease manufacturing and warranty costs and adversely affect ourrelationships with our customers. In addition, because we do not recognizerevenue on the sale of an implanter until it is delivered and qualified by thecustomer, any delay in qualification would result in a delay in our ability torecognize revenue from the sale. Historically it takes approximately nine months to build, ship andobtain customer acceptance of our Ibis 1000 implanters.

 

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***We Have Only Received Orders for a Small Quantity of OurOxygen Implanter Equipment.***

 

Since we began sellingimplanters in 1996, we have only sold a total of eight Ibis 1000 oxygenimplanters at an average sale price of approximately $4,000,000 each and onei2000 oxygen implanter valued at approximately $8,000,000. We do not expect tosell more than a limited number of implanters in the near future. The sale ofone implanter would generally represent a substantial portion of our annualrevenue.  Accordingly, the delay in themanufacture or delivery of even one unit would have a material adverse effecton our quarterly or annual results of operations.

 

***Our Implanters and Associated Technology are Subject toExport Regulations, Which Could Prevent or Delay the Sale of Such Products inForeign Countries.***

 

Certain technologiesassociated with our implanters are subject to export regulations administeredby the U.S. Department of Commerce. Accordingly, we may be required to secureU.S. export licenses with respect to sales of implanters or transfers of technologiesto end users in certain foreign countries. This requirement could result in significant delays in, or theprevention of, sales of implanters or transfers of technology or other suchtechnical data to customers in certain foreign countries.  For example, the sale of an Ibis 1000implanter and the corresponding transfer of technology to Simgui required anexport license which took approximately one year to secure.  There can be no assurance that if necessary,we will be able to secure such licenses in the future in a timely manner, or atall.

 

***The Loss of Key Members of Our Scientific and ManagementStaff Could Delay and May Prevent the Achievement of Our Research, Developmentand Business Objectives.***

 

Our Chief ExecutiveOfficer, Martin J. Reid, and other current officers and key members of ourscientific staff are responsible for areas such as product development andimprovements, and process improvements research, which are important to ourspecialized scientific business. The loss of, and failure to promptly replace,any member of this group could significantly delay and may prevent theachievement of our research, development and business objectives. While we haveentered into an employment agreement with our Chief Executive Officer, undercertain circumstances he may be able to terminate his employment with us.Furthermore, although our employees are subject to certain confidentiality andnon-competition obligations, our key personnel may terminate their employmentat any time and may become employed by a competitor.

 

***We May Not Be Able to Successfully Produce Our Products on aLarge-Scale.***

 

We have limitedmanufacturing experience and have only manufactured limited quantities ofSIMOX-SOI wafers and Ibis 1000 and i2000 oxygen implanters for low volumeproduction. To be successful, our products must be manufactured in commercialquantities, at acceptable costs. We may not be able to make the transition tohigh volume commercial production successfully. Future production in commercialquantities may create technical and financial challenges for us. We currentlyhave eight Ibis 1000 oxygen implanters, two of which are owned by a customer,available for the production of wafers. One additional Ibis 1000 implanter is used for internal research anddevelopment and one implanter is held in inventory for sale. In addition, ourfirst i2000 implanter, is producing 300 mm wafers for sale and two other i2000implanters are under construction. We shipped one i2000 implanter to a customerin the fourth quarter of 2002 and it is in the process of being accepted attheir site.  Any difficulty or delay incompleting the development of the i2000 or in constructing additionalimplanters if needed could have a material adverse effect on our business.

 

***We May Not Be Able to Use All of Our Existing or FutureManufacturing Capacity at a Profitable Level.***

 

We have spent largeamounts of money to upgrade and increase our wafer fabrication, assembly andtest manufacturing capacity. Because a significant portion of our expenses isfixed, if we end up not needing this capacity and capability for any of avariety of reasons, including inadequate demand or a significant shift

 

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in the mix of product orders making our existing capacity andcapability inadequate or in excess of our actual needs, our fixed costs perwafer produced will increase, which would adversely affect us. At times we mayalso have the capacity to produce more oxygen implantation machines than wehave orders for at such times. During such idle time we would continue to beresponsible for the fixed costs for maintaining personnel and space for suchproduction, which could have a material adverse effect on our business.

 

***We May Not Successfully Form or Maintain Desirable StrategicAlliances.***

 

We believe we will needto form alliances with strategic partners for the manufacturing, marketing anddistribution of our products. We may enter into these strategic alliances tosatisfy customer demand and to address possible customer concerns regarding ourbeing a sole source supplier. The limited number of reliable sources of supplyother than Ibis may adversely affect or delay the integration of SIMOX-SOIwafers in mainstream commercial applications. We currently have strategicrelationships with SUMCO, MEMC and one other major silicon wafer manufacturer.We may not be successful in maintaining such alliances or in forming andmaintaining other alliances, including satisfying our contractual obligationswith our strategic partners, and our partners may not devote adequate resourcesto manufacture, market and distribute these products successfully or mayattempt to compete with us.

 

***We May Have Difficulty Obtaining the Materials andComponents Needed to Produce Our Products.***

 

Pursuant to an agreementthat we entered into with MEMC in 2001, MEMC is the primary supplier to us ofsilicon substrate material.  If MEMC isnot able to meet our demand for silicon wafers, and we are unable to obtainsubstitute wafers from other vendors, we would be unable to manufacture ourSIMOX-SOI wafer products.  Any shortagesin the availability of silicon wafers or a significant increase in the price ofsilicon wafers could have a material adverse effect on our business. Wemanufacture our oxygen implanters from standard components and from componentsmanufactured in-house or by other vendors according to our designspecifications. Although we have not experienced any significant productiondelays due to the unavailability of or delay in obtaining our component partsor raw materials to date, a disruption or termination of certain of our vendorsmay occur. Any such disruption or termination could have a material adverseeffect on our business.

 

***We May Need Substantial Additional Capital in the Future.***

 

We anticipate that ourexisting capital resources, will enable us to maintain currently plannedoperations for at least the next twelve months.  However, this expectation is based on our current operating planwhich may change.  We intend to continueto invest in facilities and state-of-the-art equipment in order to increase ourresearch, development and manufacturing capabilities. Changes in technology orsales growth beyond currently established capabilities would require furtherinvestment. As a result, we may need to raise substantial additional capital inthe future.  We have previously financedour working capital requirements through:

 

•      equityfinancings, including warrant and option exercises,

•      equipmentlines of credit,

•      a workingcapital line of credit,

•      a term loan,

•      sale-leasebackarrangements,

•      collaborativerelationships,

•      wafer productand equipment sales, and

•      governmentcontracts.

 

We may not be able toraise any required additional funds on terms favorable to us, or at all.  If future financing is not available or isnot available on acceptable terms, we may not be able to fund our future needs,

 

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which would seriously harm our business and results of operations. Inaddition, if we raise additional funds through the sale of equity orconvertible debt securities, the value of our stock outstanding may bediluted.  We may also have to issuesecurities that have rights, preferences and privileges senior to our commonstock.

 

***We May Not Be Able to Protect Our Patents and ProprietaryTechnology.***

 

Our ability to competeeffectively with other companies will depend, in part, on our ability tomaintain the proprietary nature of our technology. Although we have beenawarded or have filed applications for a number of patents in the U.S. andforeign countries, those patents may not provide meaningful protection, orpending patents may not be issued. Our competitors in both the U.S. and foreigncountries, many of which have substantially greater resources and have madesubstantial investments in competing technologies, may have or may obtainpatents that will prevent, limit or interfere with our ability to make and sellour products or intentionally infringe on our patents. The defense and prosecutionof patent suits is both costly and time-consuming, even if the outcome isfavorable to us. In addition, there is an inherent unpredictability regardingobtaining and enforcing patents. An adverse outcome in the defense of a patentsuit could:

 

•      subject us tosignificant liabilities to third parties,

•      requiredisputed rights to be licensed from third parties, or

•      require us tocease selling our products.

 

We also rely in largepart on unpatented proprietary technology and others, including strategic partners,may independently develop the same or similar technology or otherwise obtainaccess to our proprietary technology. To protect our rights in these areas, wecurrently require all of our employees to enter into confidentialityagreements. However, these agreements may not provide meaningful protection forour trade secrets, know-how or other proprietary information in the event ofany unauthorized use, misappropriation or disclosure of such trade secrets,know-how or other proprietary information.

 

Others may claim that ourtechnology infringes on their proprietary rights. Any infringement claims, evenif without merit, can be time consuming and expensive to defend and may divertmanagement’s attention and resources. If successful, they could also require usto enter into costly royalty or licensing agreements. A successful claim ofproduct infringement against us and our inability to license the infringed orsimilar technology could adversely affect our business.

 

***If We Do Not Comply With All Applicable EnvironmentalRegulations, We Could be Subject to Fines and Other Sanctions.***

 

We are subject to avariety of federal, state and local environmental regulations related to thestorage, treatment, discharge or disposal of chemicals used in our operationsand exposure of our personnel to occupational hazards. Although we believe thatwe have all permits necessary to conduct our business, the failure to complywith present or future regulations could result in fines being imposed on us,suspension of production or a cessation of operations. Our future activitiesmay result in our being subject to additional regulations. Such regulationscould require us to acquire significant equipment or to incur other substantialexpenses to comply with regulations. Our failure to control the use of, or torestrict adequately the discharge of, hazardous substances or properly controlother occupational hazards could subject us to substantial financialliabilities.

 

***Our stock price ishighly volatile.***

 

The market pricesfor securities of high tech companies have been volatile. This volatility hassignificantly affected the market prices for these securities for reasonsfrequently unrelated to the operating performance of the specific companies.These broad market fluctuations may adversely affect the market price of ourcommon stock. The market price for our common stock has fluctuatedsignificantly.  Since January 1, 1999,our stock price has fluctuated from a high of $135.00 to a low of $3.15.  It is likely that the

 

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market price of our stock will continue to fluctuate in the future.Events or factors that may have a significant impact on our business and on themarket price of our common stock include the following:

 

•                     quarterlyfluctuations in operating results,

•                     difficultyin forecasting future results,

•                     announcementsby us or our present or potential competitors,

•                     technologicalinnovations or new commercial products or services by us or our competitors,

•                  thetiming of receipt of orders from major customers,

•                  productmix,

•                  productobsolescence,

•                  shiftsin customer demand,

•                  ourability to manufacture and ship products on a cost-effective and timely basis,

•                  marketacceptance of new and enhanced versions of our products or implanters,

•                  theevolving and unpredictable nature of the markets for the products incorporatingour SIMOX-SOI wafers,

•                  theamount of research and development expenses associated with new or enhancedproducts or implanters

•                     thecyclical nature of the semiconductor industry, and

•                     generalmarket conditions.

 

***Future issuances of preferred stock may diminish the rightsof our common stockholders.***

 

Our board of directors has the authority to issue upto 2,000,000 shares of preferred stock and to determine the price, rights,privileges and other terms of these shares. The board of directors may exercise this authority without the approvalof the stockholders.  The rights of theholders of common stock may be adversely affected by the rights of the holdersof any preferred stock that may be issued in the future.

 

***Anti-takeover provisions in our charter and bylaws andprovisions of Massachusetts law could make a third-party acquisition of usdifficult.***

 

Our restatedarticles of organization, as amended, and restated bylaws and the MassachusettsBusiness Corporation Law contain certain provisions that may make a third-partyacquisition of us difficult, including:

 

•                                          aclassified board of directors, with three classes of directors each serving astaggered three-year term;

•                                          theability of the board of directors to issue preferred stock;

•                                          a75% super-majority shareholder vote to amend certain provisions of our articlesof organization and bylaws; and

•                                          therequirement under Massachusetts law that any stockholder action by writtenconsent be unanimous.

 

**Item 2.   DESCRIPTIONOF PROPERTY**

 

Ibis’ corporate office and manufacturing facilitiesare located at leased facilities in Danvers, Massachusetts. We have twobuildings in Danvers, which effectively separate our two business segments:Implantation equipment design and manufacture and SIMOX wafer production. Wehave a 40,000 square foot facility dedicated to wafer operations which includesmodernized cleanrooms that contain a total of eight implanters, upgraded metrologyequipment and cleaning equipment. The implantation equipment design andmanufacturing facility is approximately 20,000 square feet and we have anadditional 20,000 square feet of adjacent space for future expansion. Theleases expire on December 31, 2003 and May 31, 2005, respectively, and containoptions to renew for five years.

 

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**Item 3.   LEGALPROCEEDINGS**

 

Ibis is not a party to any material pending legalproceedings, and management is not aware of any contemplated proceeding by anygovernmental authority against us of a material nature.

 

 

**Item 4.   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted to stockholders during thefourth quarter of the year ended December 31, 2002.

 

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**PART II**

 

**Item5.   MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Market Information**

 

Ibis’ Common Stock began trading on May 20, 1994 onthe Nasdaq SmallCap Market and on the Boston Stock Exchange. Prior to May 20,1994, there was no public market for the Common Stock or any other securitiesof Ibis.  On April 4, 1996, Ibiscommenced trading on the Nasdaq National Market.  Our Common Stock is traded under the symbol “IBIS.” The followingtables set forth, for 2001 and 2002, the high and low sale prices for theCommon Stock as reported by the Nasdaq National Market.

 
|           |   | **Common  Stock** |   |
|----------------|--------|-------------------|--------|
|           |   | **High**          |   | **Low** |   |
|           |   |              |   |   |   |
| 2001:          |   |              |   |   |   |
| First Quarter  |   | $                 | 36.75  |   | $ | 16.50 |   |
| Second Quarter |   | $                 | 28.98  |   | $ | 9.50 |   |
| Third Quarter  |   | $                 | 12.50  |   | $ | 3.15 |   |
| Fourth Quarter |   | $                 | 15.59  |   | $ | 4.10 |   |
| 2002:          |   |              |   |   |   |
| First Quarter  |   | $                 | 15.64  |   | $ | 7.25 |   |
| Second Quarter |   | $                 | 14.95  |   | $ | 4.35 |   |
| Third Quarter  |   | $                 | 7.15   |   | $ | 3.59 |   |
| Fourth Quarter |   | $                 | 7.50   |   | $ | 3.65 |   |

 

**Stockholders**

 

As of March 3, 2003, there were approximately 150stockholders of record of the 9,474,940 outstanding shares of Common Stock andapproximately 6,800 beneficial owners of the Common Stock.

 

**Dividends**

 

Ibis has never declared or paid any dividends and doesnot anticipate paying such dividends on its Common Stock in the foreseeablefuture.  Ibis currently intends toretain any future earnings for use in its business. The payment of any futuredividends will be determined by the Board of Directors in light of conditionsthen existing, including our financial condition and requirements, futureprospects, restrictions in financing agreements, business conditions and otherfactors deemed relevant by the Board of Directors.

 

**Recent Sales of UnregisteredSecurities**

 

During the fourth quarter of the fiscal year endedDecember 31, 2002, there were no sales of securities that were not registeredunder the Securities Act of 1933.

 

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**Item 6.   SELECTEDFINANCIAL DATA**

 

The selected financial data presented below under thecaptions “Statement of Operations Data” and “Balance Sheet Data” for, and as ofthe end of each of the years in the five-year period ended December 31, 2002,are derived from the financial statements of Ibis, which financial statementshave been audited by KPMG LLP, independent certified public accountants. Theaudited balance sheets at December 31**,**2002 and 2001 and the related statementsof operations, stockholders equity and cash flows for each of the years in thethree-year period ended December 31, 2002 and the auditors’ report thereon, areincluded elsewhere in this Annual Report on Form 10-K. The data set forth belowshould be read in conjunction with Ibis’ financial statements, the relatednotes thereto and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included elsewhere in this Annual Report on Form10-K.

 
|                                        |   | **Years  Ended December 31,**                  |   |
|---------------------------------------------|--------|------------------------------------------------|--------|
|                                        |   | **1998**                                       |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                        |   | **(In  thousands, except for per share data)** |   |
| **Statement of Operations Data:**           |   |                                           |   |   |   |   |   |   |   |   |   |
| Product sales                               |   | $                                              | 3,149  |   | $ | 5,282 |   | $ | 8,173 |   | $ | 5,391 |   | $ | 7,646 |   |
| Contract and  other revenue                 |   | 1,087                                          |   | 1,257 |   | 533 |   | 518 |   | 283 |   |
| Equipment  revenue                          |   | 11,230                                         |   | 10,064 |   | 5,769 |   | 1,525 |   | 6,103 |   |
| Total revenue                               |   | 15,466                                         |   | 16,603 |   | 14,475 |   | 7,434 |   | 14,032 |   |
| Cost of product  sales                      |   | 4,581                                          |   | 4,644 |   | 5,824 |   | 8,210 |   | 14,457 |   |
| Cost of contract  and other revenue         |   | 976                                            |   | 443 |   | 388 |   | 376 |   | 115 |   |
| Cost of  equipment revenue                  |   | 7,347                                          |   | 7,242 |   | 3,482 |   | 1,502 |   | 3,868 |   |
| Total cost of  revenue                      |   | 12,904                                         |   | 12,329 |   | 9,694 |   | 10,088 |   | 18,440 |   |
| Gross profit  (loss)                        |   | 2,562                                          |   | 4,274 |   | 4,781 |   | (2,654 | ) | (4,408 | ) |
| Operating  expenses:                        |   |                                           |   |   |   |   |   |   |   |   |   |
| General and  administrative                 |   | 1,823                                          |   | 1,787 |   | 1,998 |   | 2,273 |   | 2,174 |   |
| Marketing and  selling                      |   | 470                                            |   | 1,016 |   | 1,640 |   | 1,813 |   | 1,510 |   |
| Research and  development                   |   | 1,972                                          |   | 1,774 |   | 4,587 |   | 5,119 |   | 6,258 |   |
| Total operating  expenses                   |   | 4,265                                          |   | 4,577 |   | 8,225 |   | 9,205 |   | 9,942 |   |
| Loss from  operations                       |   | (1,703                                         | )      | (303 | ) | (3,444 | ) | (11,859 | ) | (14,350 | ) |
| Total other  income                         |   | 538                                            |   | 1,140 |   | 1,943 |   | 2,265 |   | 255 |   |
| Income (loss)  before income taxes          |   | (1,165                                         | )      | 837 |   | (1,501 | ) | (9,594 | ) | (14,095 | ) |
| Income tax  expense                         |   | (1                                             | )      | (10 | ) | (1 | ) | (1 | ) | (1 | ) |
| Net income  (loss)                          |   | $                                              | (1,166 | ) | $ | 827 |   | $ | (1,502 | ) | $ | (9,595 | ) | $ | (14,096 | ) |
| Net income  (loss) per common share(1)      |   | $                                              | (.17   | ) | $ | .11 |   | $ | (.18 | ) | $ | (1.15 | ) | $ | (1.53 | ) |
| Weighted average  common shares outstanding |   | 6,760                                          |   | 7,404 |   | 8,286 |   | 8,378 |   | 9,208 |   |

 
|                                  |   | **As of  December 31,** |   |
|---------------------------------------|--------|-------------------------|--------|
|                                  |   | **1998**                |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                  |   | **(In  thousands)**     |   |
| **Balance Sheet Data:**               |   |                    |   |   |   |   |   |   |   |   |   |
| Working capital                       |   | $                       | 16,831 |   | $ | 43,309 |   | $ | 32,585 |   | $ | 11,232 |   | $ | 5,551 |   |
| Total assets                          |   | 24,307                  |   | 53,728 |   | 56,299 |   | 54,920 |   | 51,699 |   |
| Long-term debt,  less current portion |   | 40                      |   | 30 |   | 18 |   | 2,718 |   | 1,184 |   |
| Total  liabilities                    |   | 3,698                   |   | 5,347 |   | 6,780 |   | 14,560 |   | 12,944 |   |
| Stockholders’  equity            |   | 20,609                  |   | 48,381 |   | 49,519 |   | 40,360 |   | 38,755 |   |
|                                       |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Computed on the basis described for net earnings(loss) per common share in Note 2(g) of Notes to Financial Statements.

 

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**Item 7.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing discussion should be read in conjunction with the FinancialStatements of Ibis (including Notes thereto) and Selected Financial Dataincluded elsewhere in this Annual Report on Form 10-K.*

 

**OVERVIEW**

 

Ibis Technology Corporation (“Ibis”) was formed inOctober 1987 and commenced operations in January 1988. Ibis’ initial activitiesconsisted of producing and selling SIMOX-SOI wafers and conducting research anddevelopment activities. This research led to the development of proprietarynext generation oxygen implanters, the Ibis 1000, which we began selling in1996, and the i2000, and also to other proprietary process technology.

 

Initially, much of our revenue was derived fromresearch and development contracts and sales of wafers for militaryapplications. Over the years, there was a shift in revenue to sales ofSIMOX-SOI wafers for commercial applications and the nature of our business hasevolved through stages where sometimes our revenues primarily resulted fromselling wafers for evaluation purposes, and sometimes our revenue was generatedprimarily from equipment sales. This is a normal path to follow while developingand promoting a fundamental new technology, especially when it relates to thesemiconductor industry embracing any change that affects fabricationoperations.  This trend is expected tocontinue in the near-term as our customers continue to sample SOI and the earlyadopters work to achieve stable production processes and enter pilotproduction. We believe that we are in the technology rollout stage of ourcorporate life cycle. Our fundamental SIMOX-SOI technology has been developed,refined, and proven over the last dozen years. In 2002, Ibis introduced the next generation production-worthySIMOX-SOI, which includes both the modified low dose (“MLD”) wafer processlicensed to Ibis by IBM and the i2000, our next-generation oxygen implanter,which is capable of producing eight and twelve inch (or 200 and 300 mm)SIMOX-SOI wafers. In 1999, we commenced a program to design and develop thei2000, introduced it in March 2002 and began shipping 300 mm wafers implantedfrom this machine shortly thereafter. A majority of the wafers shipped in thefourth quarter of 2002 were 300 mm.  InSeptember 2002, we received an order valued at approximately $8 million for ani2000 oxygen implanter from a major semiconductor manufacturer.  The implanter was shipped to this customerin the last quarter of 2002 and is undergoing factory acceptance.

 

Commercial shipments of our wafers have been usedprincipally for evaluation purposes or pilot production in products, includingmicroprocessors, gate arrays, ASICs (application specific integrated circuits),memories (DRAMs, SRAMs, etc.), and cellular and mobile radio components. Fromour customers’ perspective, the pathway to SOI adoption is complex and timeconsuming.  Typically, a customer willgo through three major 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.

 

Each of these stages has many steps, and customersmust evaluate each new wafer technology that essentially lays a new foundationfor substantially all other processes they have spent billions of dollars anddecades of time developing. Accordingly, it takes anywhere from 12 to 36 months for a customer toproceed from initial sampling through R&D to initial production, which isnot unlike the standard process for qualifying any new wafer material.  These steps apply each time there is achange in the customer’s fabrication process, such as a feature-size change ornew material.  To date, most of ourcustomers have purchased wafers for the purpose of characterizing andevaluating the wafers, developing prototype products or for pilot production,consequently historical sales are not necessarily an indication of futureoperations.

 

At December 31, 2002, Ibis had eight Ibis 1000implanters, two of which are owned by a customer, available to produce up to200 mm SIMOX wafers and one i2000 available to produce 300 mm SIMOX

 

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wafers.  One more Ibis 1000implanter is available for sale and an additional one is dedicated as aresearch and development tool.  We alsohave two additional i2000 implanters under construction that will be availablefor sale or utilized internally for wafer production. During the fourth quarterof 2002, a majority of our wafer sales were for 300 mm SIMOX wafers. Althoughour 200 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 technologyduring the current process cycle (which typically last two to three years) orour customers transition to the 300 mm wafer size sooner than we anticipate,our 200 mm and smaller wafer size production line may become obsolete and wewould be required to reduce our income by an impairment loss which could bematerial.

 

We will continue to review our assumptions about ourlong-lived assets on a periodic basis for potential impairment in futurequarters.  We cannot be sure that ourimplanters or other long-lived assets will not become impaired in the future.In addition, the impairment factors evaluated by Management may change insubsequent periods, given the current trends of the business environment.

 

Ibis has experienced quarterly and annual fluctuationsin revenue and results of operations due to the timing of receipt of equipmentorders and dependence on a limited number of customers.  We expect to continue to experiencefluctuations in revenue due to equipment sales and shifts in customer demandsduring various stages of the SIMOX-SOI sales cycle.  We recognize implanter revenue in accordance with SAB 101, whichincludes among other criteria, the shipment and factory installation of theimplanter at the customer’s location. As a result, deferral of revenue may extend longer due to meeting thesecriteria.

 

**CriticalAccounting Policies**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that have a significantimpact on the results we report in our financial statements. Some of ouraccounting policies require us to make difficult and subjective judgments,often as a result of the need to make estimates of matters that are inherentlyuncertain. Our most critical accounting policies include: revenue recognition,inventory valuation and reserves, accounts receivable reserves and theassessment of long-lived asset impairment. Actual results may differ from theseestimates under different assumptions or conditions.  Below, we discuss these policies further, as well as theestimates and judgments involved.

 

***RevenueRecognition. ***Werecognize revenue from product sales, equipment sales and the sales of spareparts when all of the following criteria have been met:  (1) evidence exists that the customer isbound to the transaction; (2) the product has been delivered to the customerand, when applicable, the product has been installed and accepted by thecustomer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sale price is reasonablyassured.  Provisions for estimated salesreturns and allowances are made at the time 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.

 

***Inventory Valuationand Reserves. ***Ourpolicy for the valuation of inventory, including the determination of obsoleteor excess inventory, requires us to estimate the future demand for our productswithin specific time horizons, generally twelve months or less. If ourestimated demand for specific products is greater than actual demand and wefail to reduce 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

 

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or market. Once established, any write-downs of inventory areconsidered permanent adjustments to the cost basis of the inventory.

 

***Accounts ReceivableReserves. ***Accountsreceivable are reduced by an allowance for amounts that may becomeuncollectible in the future.  Theestimated allowance for uncollectible amounts is based primarily on a specificanalysis of accounts in the receivable portfolio and a general reserve based onthe aging of receivables and historical write-off experience.  While management believes the allowance tobe adequate, if the financial condition of our customers were to deteriorate, resultingin impairment of their ability to make payments, additional allowances may berequired and could materially impact our financial position and results ofoperations.

 

***Valuation ofLong-Lived Assets. ***Ibisreviews the valuation of long-lived assets, including property and equipmentand licenses, under the provisions of SFAS No. 144, Accounting for Impairmentor Disposal of Long-Lived Assets. Management is required to assess the recoverability of its long-livedassets whenever events and circumstances indicate that the carrying value maynot be recoverable.  Factors we considerimportant that could trigger an impairment review include the following:

 

•                  Significant underperformance relative to expected historical orprojected future operating results;

•                  Significant changes in the manner of our use of the acquired assets orthe strategy of our overall business;

•                  Significant negative industry or economic trends;

•                  Significant decline in our stock price for a sustained period; and

•                  Our market capitalization relative to book value.

 

In accordance with SFAS No. 144, when we determinethat the carrying value of applicable long-lived assets may not be recoverablebased upon the existence of one or more of the above indicators of impairment,we evaluate whether the carrying amount of the asset exceeds the sum of theundiscounted cash flows expected to result from the use and eventualdisposition of that asset.  If such acircumstance exists, we would measure an impairment loss to the extent thecarrying amount of the particular long-lived asset or group exceeds its fairvalue.  We would determine the fairvalue based on a projected discounted cash flow method using a discount ratedetermined by our management to be commensurate with the risk inherent in ourcurrent business model. We adopted SFAS No. 144 during the first quarter of2002 without a material impact on our financial position or results ofoperations.

 

**Resultsof Operations**

 

***Fiscal Year Ended December 31, 2002Compared to Fiscal Year Ended December 31, 2001***

 

***Product Sales***.  Wafer product sales increased to $7,646,307for the fiscal year ended December 31, 2002, an increase of $2,255,447 or 42%from $5,390,860 for the fiscal year ended December 31, 2001.  Early in 2002, Ibis introduced ournext-generation oxygen implanter, the i2000, and for the first time we beganshipping 300 mm SIMOX wafers produced on that implanter shortly thereafter. Theincrease in product sales is primarily attributable to sales of 300 mm SIMOXwafers by Ibis in the United States and the Pacific Rim. For the fiscal yearended December 31, 2002, sales of 300 mm wafers accounted for approximately 44%of our total wafer product sales. This increases was offset by decreased wafersales by Ibis in Europe, as a result of continued adverse business conditionsfor one of our largest wafer customers that is in the optical components arena.

 

***Contract and Other Revenue***.  Contract and other revenue for the fiscalyear ended December 31, 2002 was $282,979 compared to $518,379 for the fiscalyear ended December 31, 2001, a decrease of $235,400 or 45%, which is due todecreased government contract work.

 

***Equipment Revenue.***  Equipment revenue increased to $6,102,748for the fiscal year ended December 31, 2002 from $1,525,317 for the fiscal yearended December 31, 2001, an increase of $4,577,431 or 300%.

 

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Equipment revenue in 2002 included approximately $5,000,000 of revenuerecognized from the sale of an Ibis 1000 to our customer in China. Thisimplanter was shipped in December 2001, however, revenue was recognized uponcustomer site acceptance which occurred during the third quarter of 2002.Equipment revenue for 2001 consisted solely of parts and service revenue.  Field service revenue accounted for $289,295or 5% of equipment revenue for the fiscal year ended December 31, 2002 ascompared to $914,188 or 60% of equipment revenue for the fiscal year endedDecember 31, 2001.  Sales of spare partsaccounted for $813,453 or 13% of equipment revenue for the fiscal year endedDecember 31, 2002 as compared to $611,129 or 40% of equipment revenue for thefiscal year ended December 31, 2001.

 

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2002 was $14,032,034, an increase of $6,597,478 or 89% from$7,434,556 for the fiscal year ended December 31, 2001. Approximately $5million of this increase is due to the revenue recognized from the sale of anIbis 1000 implanter to a customer in China and the remainder is due to sales of300 mm SIMOX wafers by Ibis.

 

***Total Cost of Sales and Revenue.***  Cost of wafer product sales for the fiscalyear ended December 31, 2002 was $14,456,781, as compared to $8,209,540 for thefiscal year ended December 31, 2001, an increase of $6,247,241 or 76%.  This increase is mainly attributable to theincrease in fixed costs associated with production, which include depreciation,amortization and occupancy costs. Equipment repair and maintenance, outsidetesting services and royalty expenses incurred on the MLD process alsoincreased.  In addition, the optimumproduction yield on our 300 mm wafer products has not yet been realized whichresulted in higher costs.  Cost ofcontract and other revenue for the fiscal year ended December 31, 2002 was$115,141, as compared to $376,371 for the fiscal year ended December 31, 2001,a decrease of $261,230 or 69%.  Cost ofequipment revenue for the fiscal year ended December 31, 2002 was $3,868,197,as compared to $1,502,356 for the fiscal year ended December 31, 2001, anincrease of $2,365,841 or 158%.  Thisincrease is due to costs recognized on the sale of an Ibis 1000 implanter to acustomer in China. There were no implanter sales last year. As a result of theforegoing, the total cost of sales and revenue for the fiscal year endedDecember 31, 2002 was $18,440,119 as compared to $10,088,267 for the fiscalyear ended December 31, 2001, an increase of $8,351,852, or 83%.  The gross margin for all sales was anegative 31% for the fiscal year ended December 31, 2002 as compared to anegative 36% for the fiscal year ended December 31, 2001.  The negative gross margin in 2002 for allsales is attributable to increased wafer costs and less than optimal productionyields on new products, which were partially offset by a 37% gross margin onequipment revenue.

 

***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2002 were $2,174,198 (15% of total revenue) ascompared to $2,273,077 (31% of total revenue) for the fiscal year endedDecember 31, 2001, a decrease of $98,879 or 4%.  This is a result of a decrease in legal fees of approximately$350,000 offset by salaries and related expenses.

 

***Marketing and Selling Expenses. ***Marketing and selling expenses for thefiscal year ended December 31, 2002 were $1,509,792 (11% of total revenue) ascompared to $1,812,891 (24% of total revenue) for the fiscal year endedDecember 31, 2001, a decrease of $303,099 or 17%.  The decrease in marketing and selling expenses is a result of adecrease in salaries and related expenses and advertising.

 

***Research and Development Expenses. ***Internally funded research and developmentexpenses increased by $1,138,824 or 22% to $ 6,257,839 (45% of total revenue)for the fiscal year ended December 31, 2002 from $5,119,015 (69% of total revenue)for the fiscal year ended December 31, 2001. This increase is primarily due to increased depreciation on fixedassets, specifically the Ibis 1000 R & D tool and i2000 test stands, aswell as increased consulting services.

 

***Other Income.* **Total other income for the fiscal year ended December 31,2002 was $254,991 as compared to $2,265,031 for the fiscal year ended December31, 2001, a decrease of $2,010,040 or 89%. The decrease in total other income is attributable to non-recurringincome recognized in 2001 amounting to approximately $1.4 million which is theresult of an expired wafer production capacity option and decreased interestincome earned as a result of lower average cash balances and a reduction ininterest rates.

 

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As of December 31, 2002, the Company had federal netoperating loss and general business credit carryforwards of approximately$49,812,000 and $1,034,000, respectively, for tax purposes expiring through2022.   As a result of the public stockoffering that closed in April 1996 of 1,600,000 shares at $7.25 per share, achange of ownership occurred within the meaning of Sec. 382(g) of the InternalRevenue Code, which limits the amount of net operating loss carryforwards thatcan be utilized annually to offset future taxable income.  Subsequent ownership changes could give riseto further limitation on the company’s ability to utilize these net operatingloss and general business credit carryforwards.

 

***Fiscal Year Ended December 31, 2001Compared to Fiscal Year Ended December 31, 2000***

 

***Product Sales***.  Wafer product sales decreased to $5,390,860for the fiscal year ended December 31, 2001, a decrease of $2,782,235 or 34%from $8,173,095 for the fiscal year ended December 31, 2000.  The decrease in product sales isattributable to decreased wafer sales by Ibis in Europe, as the impact of theorder cutback announced in mid-April 2001 from one of our largest wafercustomers in the optical components arena, was realized.  In the Pacific Rim wafer sales increasedoverall during this twelve-month period. Sales by Ibis in the United States also increased overall during thistwelve-month period, even though our largest domestic customer delayed furtherSIMOX-SOI wafer purchases during their qualification of our Advantox MLDprocess.  In December 2000, Ibis enteredinto a royalty-bearing license agreement with this customer which gives Ibisthe right to manufacture and sell SIMOX-SOI wafers using the licensedprocess.  Ibis began shipping samplequantities of this material in May 2001.

 

***Contract and Other Revenue***.  Contract and other revenue decreased for thefiscal year ended December 31, 2001 to $518,379 from $532,395 for the fiscalyear ended December 31, 2000, a decrease of $14,016 or 3%.  This decrease is due to decreased governmentcontract work.

 

***Equipment Revenue.***  Equipment revenue decreased to $1,525,317for the fiscal year ended December 31, 2001 from $5,769,393 for the fiscal yearended December 31, 2000, a decrease of $4,244,076 or 74%.  Equipment revenue in 2000 included animplanter sale, whereas equipment revenue for 2001 consisted solely of partsand service revenue.  Field servicerevenue accounted for $914,188 or 60% of equipment revenue for the fiscal yearended December 31, 2001 as compared to $474,670 or 8% of equipment revenue forthe fiscal year ended December 31, 2000. Sales of spare parts accounted for $611,129 or 40% of equipment revenuefor the fiscal year ended December 31, 2001 as compared to $572,723 or 10% ofequipment revenue for the fiscal year ended December 31, 2000.

 

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2001 was $7,434,556, a decrease of $7,040,327 or 49% from$14,474,883 for the fiscal year ended December 31, 2000.  Approximately $4 million of this decrease isdue to the lack of an implanter sale in 2001 and the remainder is due primarilyto a decrease in wafer sales to two customers.

 

***Total Cost of Sales and Revenue.***  Cost of wafer product sales for the fiscalyear ended December 31, 2001 was $8,209,540, as compared to $5,824,160 for thefiscal year ended December 31, 2000, an increase of $2,385,380 or 41%.  This increase is primarily attributable tothe increase in fixed costs associated with production, which includedepreciation, amortization and occupancy costs. Equipment repair andmaintenance and wafer reserves also increased. Cost of contract and other revenue for the fiscal year ended December31, 2001 was $376,371, as compared to $388,320 for the fiscal year endedDecember 31, 2000, a decrease of $11,949 or 3%.  Cost of equipment revenue for the fiscal year ended December 31,2001 was $1,502,356, as compared to $3,481,516 for the fiscal year endedDecember 31, 2000, a decrease of $1,979,160 or 57%.  This decrease is due to lack of implanter sales and increasedequipment reserves in 2001 compared to the prior year which included the costof an implanter. As a result of the foregoing, the total cost of sales andrevenue for the fiscal year ended December 31, 2001 was $10,088,267 as comparedto $9,693,996 for the fiscal year ended December 31, 2000, an increase of$394,271 or 4%.  The gross margin forall sales was a negative 36% for the fiscal year ended December 31, 2001 ascompared to a positive 33% for the fiscal year ended December 31, 2000.  This decrease in gross margin for all salesis attributable to decreased wafer sales, the lack of implanter sales,increased fixed wafer costs and an increase in reserve for excess or obsoleteparts.

 

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***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2001 were $2,273,077 (31% of total revenue) ascompared to $1,998,302 (14% of total revenue) for the fiscal year endedDecember 31, 2000, an increase of 274,775 or 14%.  This is primarily a result of an increase in legal fees ofapproximately $234,000.

 

***Marketing and Selling Expenses. ***Marketing and selling expenses for thefiscal year ended December 31, 2001 were $1,812,891 (24% of total revenue) ascompared to $1,639,845 (11% of total revenue) for the fiscal year endedDecember 31, 2000, an increase of $173,046 or 11%.  The increase in marketing and sales expenses is primarily aresult of an increase in customer support expenses.

 

***Research and Development Expenses. ***Internally funded research and developmentexpenses increased by $532,640 or 12% to $5,119,015 (69% of total revenue) forthe fiscal year ended December 31, 2001 from $4,586,375 (32% of total revenue)for the fiscal year ended December 31, 2000. This increase is primarily due to increased material expenses on Ibis’SIMOX-SOI wafer development programs, which were partially offset by a decreasein consulting services used for the design and development effort on our nextgeneration oxygen implanter, the i2000.

 

***Other Income.* **Total other income for the fiscal year ended December 31,2001 was $2,265,031 as compared to $1,943,024 for the fiscal year endedDecember 31, 2000, an increase of $322,007 or 17%.  The increase in total other income is attributable tonon-recurring income amounting to approximately $1.4 million which is theresult of an expired wafer production capacity option.  This was offset by decreased interest incomeearned as a result of lower average cash balances and a reduction in interestrates.

 

**Liquidity and Capital Resources**

 

As of December 31, 2002, Ibis had cash and cashequivalents of $11,745,918, reflecting the receipt of a majority of theproceeds from the sale of an i2000 implanter in December 2002 which was dueupon shipment. In addition, in March, 2002, Ibis completed a public offering of900,000 shares of common stock at $13 per share, and on April 1, 2002, 100,000shares were exercised as an over allotment by the underwriter.  The shares were included in a shelfregistration statement filed with the Securities and Exchange Commission onJuly 8, 1999 and declared effective on July 26, 1999. Net proceeds from theoffering were approximately $12.1 million and were used primarily to fundresearch and development, capital expenditures and working capital.

 

During the fiscal year ended December 31, 2002, Ibisused $3,491,435 of cash for operating activities as compared to $11,505,240 in2001. Depreciation and amortization expense for the fiscal years ended December31, 2002 and 2001 was $6,264,549 and $3,632,664, respectively.  This accounted for 45% and 49% of totalrevenue, respectively. Due to the capital intensive nature of Ibis’ businessand the recent expansion of our 300 mm SIMOX wafer production line, Managementexpects that depreciation and amortization will continue to be a significantportion of our expenses.  To date, Ibis’working capital requirements have been funded primarily through debt and equityfinancings. The principal uses of cash during the fiscal year ended December31, 2002 were to fund operations and additions to property and equipment whichtotaled $8,688,796. At December 31, 2002, Ibis had commitments to purchaseapproximately $1,620,303 in material to be used for wafer manufacturing or forthe i2000 implanters currently under construction, and approximately $380,768in capital equipment purchases.

 

In September 2001, Ibis entered into a $4.5 millionequipment lease line with Heller Financial’s Commercial Equipment FinanceGroup.  The lease line was used tofinance the purchase of process equipment for wafer production, primarily 300mm wafers.  This line was fully drawndown in two sale-leaseback transactions, bearing interest at approximately 8%with a term of three years, and a monthly net payment of approximately$125,000.  Ibis has a fair market valuepurchase option at the end of the lease term. The lease-line is secured by the underlying assets and all otherproperty and equipment of Ibis.

 

27

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Our existing cash resources are believed to besufficient to support Ibis’ operations on our anticipated scale for the nexttwelve months. Our anticipated scale of operations assumes that wafer sales,primarily 300 mm SIMOX, continue a positive trend in 2003, with the exceptionof the first quarter which we expect to be down primarily because our largestwafer customer is still evaluating multiple types of MLD wafers for 300 mmproduction. We also anticipate that our spending rates for 2003 will reduce tomore normal levels now that we have completed the build of our second 300 mmwafer production line. In addition our outlook includes the receipt of ordersfor one to three implanters. We continue to explore equity offerings and otherforms of financing and anticipate that we may be required to raise additionalcapital in the future in order to finance future growth and our research anddevelopment programs.

 

Ibis has commitments that expire at various timesthrough 2006. Capital leases shown below are for SIMOX wafer manufacturingequipment and operating leases are primarily for facility costs for Ibis’offices and manufacturing facility. Other contractual obligations consist ofpurchase commitments for capital expenditures.

 
|                       |   | **Capital  Leases** |      | **Operating  Leases** |   | **Other  Contractual  Obligations** |   | **Total** |    |
|----------------------------|--------|---------------------|-----------|-----------------------|--------|-------------------------------------|--------|-----------|---------|
| Years ending  December 31: |   |                |      |                  |   |                                |   |      |    |
| 2003                       |   | $                   | 1,507,317 |                  | $      | 792,032                             |   | $         | 380,768 |   | $ | 2,680,117 |   |
| 2004                       |   | 1,185,746           |      | 404,914               |   | —                              |   | 1,590,660 |    |
| 2005                       |   | —              |      | 184,749               |   | —                              |   | 184,749   |    |
| 2006                       |   | —              |      | 18,490                |   | —                              |   | 18,490    |    |
|                       |   | $                   | 2,693,063 |                  | $      | 1,400,185                           |   | $         | 380,768 |   | $ | 4,474,016 |   |

 

**EffectsOf Inflation**

 

Ibis believes that over the past three years inflationhas not had a significant impact on our sales or operating results.

 

**New Accounting Pronouncements**

 

Statement of Financial Accounting Standards No. 141,“Business Combinations” (“SFAS 141”), issued in June 2001, addresses financialaccounting and reporting for business combinations which were initiated afterJune 30, 2001. This Statement also applies to all business combinationsaccounted for using the purchase method for which the date of acquisition isJuly 1, 2001, or later.

 

Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), issued in June 2001,addresses financial accounting and reporting for acquired goodwill andintangible assets.  The provisions ofSFAS 142 are required to be applied starting with fiscal years beginning afterDecember 15, 2001. Early application is permitted for entities with fiscalyears beginning after March 15, 2001, provided that the first interim financialstatements have not previously been issued. Impairment losses for goodwill andindefinite-lived intangible assets that arise due to the initial application ofSFAS 142 (resulting from a transitional impairment test) are to be reported asresulting from a change in accounting principle.

 

Statement of Financial Accounting Standards No. 143,“Accounting For Asset Retirement Obligations” (“SFAS 143”), issued in August2001, addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and for the associatedretirement costs.  SFAS 143 whichapplies to all entities that have a legal obligation associated with theretirement of a tangible long-lived asset is effective for fiscal yearsbeginning after June 15, 2001.  TheCompany does not expect the implementation of SFAS 143 to have a materialimpact on its financial condition or results of operations.

 

Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”),issued in October 2001, addresses financial accounting and reporting for

 

28

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the impairment or disposal of long-lived assets.  SFAS 144, which applies to all entities, iseffective for fiscal years beginning after December 15, 2001.

 

Ibis adopted SFAS’ 141, 142, 143 and 144 during thefirst quarter of 2002 without a material impact on our financial condition orresults of operations.

 

Statement of Financial Accounting Standards No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections,” effective for fiscal years beginning May15, 2002 or later that rescinds FASB Statement No. 4, Reporting Gains andLosses from Extinguishment of Debt, FASB Statement No. 64, Extinguishments ofDebt Made to Satisfy Sinking-Fund Requirements, and FASB Statement No. 44Accounting 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 other existing authoritative pronouncementsto make various technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The Company does not expect the implementation of SFAS No. 145 to have amaterial impact on the Company’s financial condition or results of operations.

 

Statement of Financial Accounting Standards No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” effectivefor exit or disposal activities that are initiated after December 31, 2002.  This Statement addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of commitment to anexit or disposal plan. The Company does not expect the implementation of SFASNo. 146 to have a material impact on the Company’s financial condition orresults of operations.

 

In November 2002, the FASB issued Interpretation No.45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, which clarifiesdisclosure and recognition/measurement requirements related to certainguarantees.  The disclosure requirementsare effective for financial statements issued after December 15, 2002 and therecognition/measurement requirements are effective on a prospective basis forguarantees issued or modified after December 31, 2002.  The application of the requirements of FIN45 did not have a material impact on the Company’s financial position orresults of operations.

 

Statement of Financial Accounting Standards No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure-an amendmentof FASB Statement No. 123,” 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 annualand interim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.The Company does not expect the implementation of SFAS No. 148 to have amaterial impact on the Company’s financial condition or results of operations.

 

**Business Outlook**

 

This Form 10-K contains forward-looking statementswithin the meaning of the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995 including statements regarding Ibis’ belief inthe acceptance of Ibis-produced SIMOX-SOI wafers for mainstream commercialapplications, the eventual evolution from supplying mainly SIMOX-SOI wafers tosemiconductor fabs to supplying mainly implanters to wafer manufacturers whowill supply SIMOX-SOI wafers to the fabs, our intent to pursue furtherstrategic relationships, partnerships and alliances with third parties, ourintention to add products and advance our process technology, the anticipatedincrease in wafer sales, the anticipated benefits of the i2000, and thesufficiency of our capital resources. Such statements are based on our current expectations and are subject toa number of factors and uncertainties which could cause actual results todiffer materially from those described in the forward-looking statements.  Such factors and uncertainties include, butare not limited to those set forth above in “Business – Risk Factors” andelsewhere throughout this Form 10-K. All information set forth in this

 

29

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Form 10-K is as of the date of this Form 10-K, and Ibis undertakes noduty to update this information, unless required by law.

 

**Item7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The exposure of market risk associated withrisk-sensitive instruments is not material to Ibis, as we do not transact oursales denominated in other than United States dollars, invest primarily inshort-term commercial paper, hold our investments until maturity and have notentered into hedging transactions.

 

30

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**Item 8.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**IBIS TECHNOLOGY CORPORATION**

 

**Index to Financial Statements and Financial StatementSchedule**

** **
|                                                                                                       | **Page  Number** |
|------------------------------------------------------------------------------------------------------------|------------------|
| Financial Statements:                                                                                      |             |
|                                                                                                       |             |
| Independent Auditors’ Report                                                                          | 32               |
| Balance Sheets as  of December 31, 2001 and 2002                                                           | 33               |
| Statements  of Operations for the Years Ended December 31, 2000, 2001 and 2002                             | 34               |
| Statements of Stockholders’  Equity for the Years Ended December 31, 2000, 2001 and 2002              | 35               |
| Statements  of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002                             | 36               |
| Notes to Financial Statements                                                                              |             |
|                                                                                                       |             |
| Schedule:                                                                                                  |             |
| Schedule II – Valuation and Qualifying  Accounts for the Years Ended December 31, 2000, 2001 and 2002 | S-1              |

 

31

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**INDEPENDENT****AUDITORS’REPORT**

 

The Board of Directors and Stockholders

Ibis Technology Corporation:

 

We have audited the accompanying balance sheets ofIbis Technology Corporation as of December 31, 2001 and 2002, and the relatedstatements of operations, stockholders’ equity and cash flows for each of theyears in the three-year period ended December 31, 2002. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of IbisTechnology Corporation at December 31, 2001 and 2002, and the results of itsoperations and its cash flows for each of the years in the three-year periodended December 31, 2002, in conformity with accounting principles generallyaccepted in the United States of America.

 

 

KPMG LLP

 

Boston, Massachusetts

February 1, 2003

 

32

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**IBIS TECHNOLOGY CORPORATION**

 

**BALANCESHEETS**

 

**December 31, 2001 and 2002**

 
|                                                                                                 |   | **2001**    |       | **2002**    |   |
|------------------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| **Assets**                                                                                           |   |        |       |        |   |
| **Current assets:**                                                                                  |   |        |       |        |   |
| Cash and cash  equivalents                                                                           |   | $           | 13,087,799 |        | $      | 11,745,918 |   |
| Accounts  receivable, trade, net (notes 3 and 14)                                                    |   | 5,765,614   |       | 1,598,560   |   |
| Inventories  (note 4)                                                                                |   | 1,535,512   |       | 1,231,559   |   |
| Deferred costs  (note 9)                                                                             |   | 2,474,264   |       | 2,621,580   |   |
| Prepaid expenses  and other current assets                                                           |   | 210,530     |       | 112,729     |   |
| Total current  assets                                                                                |   | 23,073,719  |       | 17,310,346  |   |
| Property and  equipment (notes 5 and 7)                                                              |   | 43,039,864  |       | 51,728,659  |   |
| Less:  Accumulated depreciation and amortization                                                     |   | (13,297,308 | )          | (19,233,900 | )      |
| Net property and  equipment                                                                          |   | 29,742,556  |       | 32,494,759  |   |
| Patents and  other assets, net (notes 6 and 7)                                                       |   | 2,104,029   |       | 1,893,854   |   |
| Total assets                                                                                         |   | $           | 54,920,304 |        | $      | 51,698,959 |   |
|                                                                                                 |   |        |       |        |   |
| **Liabilities and Stockholders’  Equity**                                                       |   |        |       |        |   |
| **Current liabilities:**                                                                             |   |        |       |        |   |
| Capital lease  obligation, current (note 7)                                                          |   | $           | 1,502,524  |        | $      | 1,501,415 |   |
| Accounts payable                                                                                     |   | 1,124,180   |       | 897,212     |   |
| Accrued  liabilities (note 8)                                                                        |   | 2,429,956   |       | 2,394,601   |   |
| Deferred revenue  (note 9)                                                                           |   | 6,785,299   |       | 6,966,325   |   |
| Total current  liabilities                                                                           |   | 11,841,959  |       | 11,759,553  |   |
| Capital lease  obligation, noncurrent (note 7)                                                       |   | 2,718,471   |       | 1,184,400   |   |
| Total  liabilities                                                                                   |   | 14,560,430  |       | 12,943,953  |   |
|                                                                                                 |   |        |       |        |   |
| **Commitments and contingencies  (notes 5, 7, 9 and 14)**                                            |   |        |       |        |   |
|                                                                                                 |   |        |       |        |   |
| **Stockholders’ equity (notes 12 and  13):**                                                    |   |        |       |        |   |
| Undesignated  preferred stock, $.01 par value                                                        |   |        |       |        |   |
| Authorized  2,000,000 shares; none issued                                                            |   | —      |       | —      |   |
| Common stock,  $.008 par value.                                                                      |   |        |       |        |   |
| Authorized  50,000,000 shares; issued 8,412,138 shares and 9,474,940 in 2001 and 2002,  respectively |   | 67,297      |       | 75,799      |   |
| Additional  paid-in capital                                                                          |   | 66,618,223  |       | 79,101,032  |   |
| Accumulated  deficit                                                                                 |   | (26,325,646 | )          | (40,421,825 | )      |
| Total  stockholders’ equity                                                                     |   | 40,359,874  |       | 38,755,006  |   |
| Total  liabilities and stockholders’ equity                                                     |   | $           | 54,920,304 |        | $      | 51,698,959 |   |

 

See accompanying notes tofinancial statements.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTSOF OPERATIONS**

 

**Yearsended December 31, 2000, 2001 and 2002**

 
|                                                   |   | **2000**   |       | **2001**    |   | **2002**    |   |
|--------------------------------------------------------|--------|------------|------------|-------------|--------|-------------|--------|
|                                                   |   |       |       |        |   |        |   |
| Product sales                                          |   | $          | 8,173,095  |        | $      | 5,390,860   |   | $ | 7,646,307 |   |
| Contract and  other revenue (note 10)                  |   | 532,395    |       | 518,379     |   | 282,979     |   |
| Equipment  revenue                                     |   | 5,769,393  |       | 1,525,317   |   | 6,102,748   |   |
| Total sales and  revenue (note 14)                     |   | 14,474,883 |       | 7,434,556   |   | 14,032,034  |   |
|                                                   |   |       |       |        |   |        |   |
| Cost of product  sales                                 |   | 5,824,160  |       | 8,209,540   |   | 14,456,781  |   |
| Cost of contract  and other revenue                    |   | 388,320    |       | 376,371     |   | 115,141     |   |
| Cost of  equipment revenue                             |   | 3,481,516  |       | 1,502,356   |   | 3,868,197   |   |
| Total cost of  sales and revenue                       |   | 9,693,996  |       | 10,088,267  |   | 18,440,119  |   |
|                                                   |   |       |       |        |   |        |   |
| Gross profit  (loss)                                   |   | 4,780,887  |       | (2,653,711  | )      | (4,408,085  | )      |
|                                                   |   |       |       |        |   |        |   |
| Operating  expenses:                                   |   |       |       |        |   |        |   |
| General and  administrative                            |   | 1,998,302  |       | 2,273,077   |   | 2,174,198   |   |
| Marketing and  selling                                 |   | 1,639,845  |       | 1,812,891   |   | 1,509,792   |   |
| Research and  development                              |   | 4,586,375  |       | 5,119,015   |   | 6,257,839   |   |
| Total operating  expenses                              |   | 8,224,522  |       | 9,204,983   |   | 9,941,829   |   |
|                                                   |   |       |       |        |   |        |   |
| Loss from  operations                                  |   | (3,443,635 | )          | (11,858,694 | )      | (14,349,914 | )      |
|                                                   |   |       |       |        |   |        |   |
| Other income  (expense):                               |   |       |       |        |   |        |   |
| Interest income                                        |   | 1,956,664  |       | 826,302     |   | 266,370     |   |
| Interest expense                                       |   | (10,031    | )          | (4,997      | )      | (11,379     | )      |
| Other (note 15)                                        |   | (3,609     | )          | 1,443,726   |   | —      |   |
| Total other  income                                    |   | 1,943,024  |       | 2,265,031   |   | 254,991     |   |
|                                                   |   |       |       |        |   |        |   |
| Loss before  income taxes                              |   | (1,500,611 | )          | (9,593,663  | )      | (14,094,923 | )      |
|                                                   |   |       |       |        |   |        |   |
| Income tax  expense (note 11)                          |   | 1,256      |       | 1,256       |   | 1,256       |   |
|                                                   |   |       |       |        |   |        |   |
| Net loss                                               |   | $          | (1,501,867 | )           | $      | (9,594,919  | )      | $ | (14,096,179 | ) |
|                                                   |   |       |       |        |   |        |   |
| Net loss per  common share:                            |   |       |       |        |   |        |   |
| Basic                                                  |   | $          | (0.18      | )           | $      | (1.15       | )      | $ | (1.53 | ) |
| Diluted                                                |   | $          | (0.18      | )           | $      | (1.15       | )      | $ | (1.53 | ) |
|                                                   |   |       |       |        |   |        |   |
| Weighted average  number of common shares outstanding: |   |       |       |        |   |        |   |
| Basic                                                  |   | 8,285,893  |       | 8,378,262   |   | 9,207,922   |   |
| Diluted                                                |   | 8,285,893  |       | 8,378,262   |   | 9,207,922   |   |

 

See accompanyingnotes to financial statements.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTSOF STOCKHOLDERS’ EQUITY**

 

**Years ended December 31, 2000, 2001 and 2002**

 
|                                        |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Total  Stockholders’  Equity** |        |
|---------------------------------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------|--------|---------------------------------------|-------------|
|                                        |   |              |   |                             |   |                     |   |                                  |        |
| **Balances at December 31, 1999**           |   | $                 | 65,382 |                             | $      | 63,543,777               |   | $                                     | (15,228,860 | ) | $ | 48,380,299 |   |
|                                        |   |              |   |                             |   |                     |   |                                  |        |
| Exercise of  stock options                  |   | 960               |   | 670,865                          |   | —                   |   | 671,825                               |        |
| Employee Stock  Purchase Plan               |   | 113               |   | 165,393                          |   | —                   |   | 165,506                               |        |
| Exercise of  warrants                       |   | 287               |   | 23,108                           |   | —                   |   | 23,395                                |        |
| Issuance of  warrants                       |   | —            |   | 1,780,000                        |   | —                   |   | 1,780,000                             |        |
| Net loss                                    |   | —            |   | —                           |   | (1,501,867               | )      | (1,501,867                            | )           |
|                                        |   |              |   |                             |   |                     |   |                                  |        |
| **Balances  at December 31, 2000**          |   | 66,742            |   | 66,183,143                       |   | (16,730,727              | )      | 49,519,158                            |        |
|                                        |   |              |   |                             |   |                     |   |                                  |        |
| Exercise of  stock options                  |   | 250               |   | 73,259                           |   | —                   |   | 73,509                                |        |
| Employee Stock  Purchase Plan               |   | 305               |   | 361,821                          |   | —                   |   | 362,126                               |        |
| Net loss                                    |   | —            |   | —                           |   | (9,594,919               | )      | (9,594,919                            | )           |
|                                        |   |              |   |                             |   |                     |   |                                  |        |
| **Balances at December 31, 2001**           |   | 67,297            |   | 66,618,223                       |   | (26,325,646              | )      | 40,359,874                            |        |
|                                        |   |              |   |                             |   |                     |   |                                  |        |
| Exercise of  stock options                  |   | 1                 |   | 1                                |   | —                   |   | 2                                     |        |
| Common stock  issued, net of issuance costs |   | 8,000             |   | 12,105,469                       |   | —                   |   | 12,113,469                            |        |
| Employee Stock Purchase Plan                |   | 501               |   | 377,339                          |   | —                   |   | 377,840                               |        |
| Net loss                                    |   | —            |   | —                           |   | (14,096,179              | )      | (14,096,179                           | )           |
|                                        |   |              |   |                             |   |                     |   |                                  |        |
| **Balances  at December 31, 2002**          |   | $                 | 75,799 |                             | $      | 79,101,032               |   | $                                     | (40,421,825 | ) | $ | 38,755,006 |   |

 

See accompanying notes tofinancial statements.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTSOF CASH FLOWS**

 

**Years ended December 31, 2000, 2001 and 2002**

 
|                                                                                       |   | **2000**    |       | **2001**    |   | **2002**   |   |
|--------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|------------|--------|
| **Cash flows from operating  activities:**                                                 |   |        |       |        |   |       |   |
| Net loss                                                                                   |   | $           | (1,501,867 | )           | $      | (9,594,919 | )      | $ | (14,096,179 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |        |       |        |   |       |   |
| Depreciation and  amortization                                                             |   | 1,662,538   |       | 3,632,664   |   | 6,264,549  |   |
| Gain (loss) on  sale of equipment                                                          |   | (3,609      | )          | 26,274      |   | —     |   |
| Changes in  operating assets and liabilities:                                              |   |        |       |        |   |       |   |
| Accounts  receivable, trade                                                                |   | 2,375,908   |       | (4,555,698  | )      | 4,167,054  |   |
| Unbilled revenue                                                                           |   | 958,715     |       | 510,500     |   | —     |   |
| Inventories                                                                                |   | (4,056,857  | )          | (2,755,511  | )      | 303,953    |   |
| Deferred costs                                                                             |   | —      |       | (2,474,264  | )      | (147,316   | )      |
| Prepaid expenses  and other current assets                                                 |   | 7,639       |       | 115,573     |   | 97,801     |   |
| Accounts payable                                                                           |   | (577,491    | )          | 77,220      |   | (226,968   | )      |
| Accrued liabilities  and deferred revenue                                                  |   | 2,019,210   |       | 3,512,921   |   | 145,671    |   |
| Net cash  provided by (used in) operating activities                                       |   | 884,186     |       | (11,505,240 | )      | (3,491,435 | )      |
| **Cash flows from investing  activities:**                                                 |   |        |       |        |   |       |   |
| Additions to  property and equipment, net                                                  |   | (11,211,689 | )          | (6,373,781  | )      | (8,688,796 | )      |
| Other assets                                                                               |   | (518,987    | )          | (26,037     | )      | (117,781   | )      |
| Net cash used in  investing activities                                                     |   | (11,730,676 | )          | (6,399,818  | )      | (8,806,577 | )      |
| **Cash flows from financing  activities:**                                                 |   |        |       |        |   |       |   |
| Payments of  capital lease obligations                                                     |   | (9,558      | )          | (341,171    | )      | (1,535,178 | )      |
| Proceeds from  sale-leaseback transaction                                                  |   | —      |       | 4,532,094   |   | —     |   |
| Proceeds from  sales of common stock, net of issuance costs                                |   | —      |       | —      |   | 12,113,469 |   |
| Exercise of  stock options, warrants and Employee Stock Purchase Plan                      |   | 860,726     |       | 435,635     |   | 377,840    |   |
| Net cash  provided by financing activities                                                 |   | 851,168     |       | 4,626,558   |   | 10,956,131 |   |
| Net decrease in  cash and cash equivalents                                                 |   | (9,995,322  | )          | (13,278,500 | )      | (1,341,881 | )      |
| Cash and cash  equivalents, beginning of year                                              |   | 36,361,621  |       | 26,366,299  |   | 13,087,799 |   |
| Cash and cash  equivalents, end of year                                                    |   | $           | 26,366,299 |        | $      | 13,087,799 |   | $ | 11,745,918 |   |
|                                                                                       |   |        |       |        |   |       |   |
| Supplemental  disclosures of cash flow information:                                        |   |        |       |        |   |       |   |
| Cash paid during  the year for interest                                                    |   | $           | 10,031     |        | $      | 4,997      |   | $ | 11,379 |   |
|                                                                                       |   |        |       |        |   |       |   |
| Supplemental  disclosures of non-cash investing and financing activities:                  |   |        |       |        |   |       |   |
| Capital lease  obligations incurred                                                        |   | $           | —     |        | $      | 973,164    |   | $ | — |   |
| Issuance of  warrants for license                                                          |   | $           | 1,780,000  |        | $      | —     |   | $ | — |   |
| Transfer of  internally constructed equipment from inventory to property and equipment     |   | $           | 6,593,981  |        | $      | 12,152,858 |   | $ | — |   |

 

See accompanying notes tofinancial statements.

 

36

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**December31, 2001 and 2002**

 

**(1) Nature of Business andOrganization**

 

Ibis Technology Corporation (the “Company”) wasincorporated in October 1987 for the purpose of supplying silicon-on-insulator(SOI) wafers formed by SIMOX (Separation by Implantation of Oxygen) technology.SIMOX-SOI wafers are manufactured by the Company using a specialized oxygen ionimplanter, which was developed and manufactured by the Company and isintegrated with other specialized processes and characterizationequipment.  The Company is the leadingmanufacturer of high current oxygen implanters and began selling these oxygenimplanters in 1996.

 

**(2)Summary of Significant Accounting Policies**

 

(a) *Cash and Cash Equivalents*

 

Cash equivalents represent highly liquid investmentswith original maturities of three months or less.

 

(b) *Inventories*

 

Inventories are stated at the lower of cost or market.Cost is determined using the first-in, first-out (FIFO) cost method.

 

(c) *Property and Equipment and Impairment of Long-LivedAssets*

 

Property and equipment is stated at cost. Depreciationis provided using the straight-line method over the estimated useful lives ofthe respective assets, ranging from three to eight years. Amortization isprovided using the straight-line method over the life of the lease, ranging fromthree and one-half to five years.

 

The Company reviews its long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net cash flows expectedto be generated by the asset.  If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the degree to which the carrying amount of the assets exceeds thefair value of the assets.

 

(d) *Patents and Other Assets*

 

Other assets consist principally of deposits, prepaidroyalties and licenses. Patents and prepaid royalties are amortized over fiveyears using the straight-line method.  Licensesare amortized over seven years using the straight-line method.

 

(e) *Revenue Recognition*

 

The Company recognizes revenue from product sales,equipment sales and the sales of spare parts when all of the following criteriahave been met:  (1) evidence exists thatthe customer is bound to the transaction; (2) the product has been delivered tothe customer and, when applicable, the product has been installed and acceptedby the customer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sale price is reasonablyassured.  Provisions for estimated salesreturns and allowances are made at the time the products are sold.  Revenue derived from services is recognizedupon performance.

 

37

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Contract revenue is recognized on thepercentage-of-completion method. Provisions for anticipated losses are made inthe period in which such losses become determinable.  Unbilled revenue under customer contracts represents revenueearned under the percentage-of-completion method but not yet billable under theterms of the contract.  These amountsare billable based on the terms of the contract, which can include shipment ofthe product, achievement of milestones or completion of the contract.

 

Government contracts are performed under negotiatedoverhead rates and are subject to audit and retroactive adjustments of amountspaid to the Company.

 

(f) *Research and Development*

 

Research and development costs are charged to expenseas incurred. Research and development costs funded by contracts are included asa component of cost of contract revenue.

 

(g) *Net Income (Loss) Per Common Share*

 

Net income (loss) per share of common stock iscomputed based upon the weighted average number of shares outstanding duringeach period and including the dilutive effect, if any, of stock options andwarrants. SFAS 128 requires the presentation of basic and diluted earnings(loss) per share for all periods presented. As the Company was in a net loss position for each of the years in thethree-years ended December 31, 2002, common stock equivalents of 471,969,224,856 and 39,644 for the years ended December 31, 2000, 2001 and 2002,respectively, were excluded from the diluted loss per share calculation as theywould be antidilutive.  As a result,diluted loss per share is the same as basic loss per share for 2000, 2001 and2002.

 

The reconciliation of the denominators of the basicand diluted net income (loss) per common share for the Company’s net income(loss) is as follows:

 
|                                                                              |   | **Years  Ended December 31,** |       |
|-----------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                              |   | **2000**                      |       | **2001** |   | **2002** |   |
|                                                                              |   |                          |       |   |   |   |   |
| Basic net loss                                                                    |   | $                             | (1,501,867 | ) | $ | (9,594,919 | ) | $ | (14,096,179 | ) |
| Weighted average common shares outstanding-basic                                  |   | 8,285,893                     |       | 8,378,262 |   | 9,207,922 |   |
| Net additional common shares upon assumed exercise  of stock options and warrants |   | —                        |       | — |   | — |   |
| Weighted average common shares outstanding diluted                                |   | 8,285,893                     |       | 8,378,262 |   | 9,207,922 |   |
| Net loss per common share                                                         |   |                          |       |   |   |   |   |
| Basic                                                                             |   | $                             | (0.18      | ) | $ | (1.15 | ) | $ | (1.53 | ) |
| Diluted                                                                           |   | $                             | (0.18      | ) | $ | (1.15 | ) | $ | (1.53 | ) |

 

----

(h) *Issuance Costs*

 

Issuance costs of common stock are netted againstadditional paid-in capital.

 

38

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(i) *Use of Estimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Actual results may differfrom these estimates.  Managementexercises judgment and relies on estimates in recognizing revenue, valuinginventory, accruing certain liabilities, and assessing long-lived assetimpairment, inventory obsolescence and accounts receivable reserves.

 

(j) *Fair Value of Financial Instruments*

 

Financial instruments of the Company consist of cashand cash equivalents, accounts receivable, accounts payable, accruedliabilities and capital lease obligations. The carrying amount of these financial instruments approximates fairvalue.

 

(k) *Stock-Based Compensation*

 

The Company accounts for its stock option plans underthe recognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations.  No stock-based compensation cost isreflected in net income for these plans, as all options granted under theseplans had an exercise price equal to the market value of the underlying commonstock on the date of grant.  Thefollowing table illustrates the effect on net income (loss) and earnings (loss)per share if the Company had applied the fair value recognition provisions ofFASB Statement No. 123, Accounting for Stock Based Compensation, to stock basedcompensation.

 
|                                                                                                            |   | **Year Ended  December 31,** |       |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                            |   | **2000**                     |       | **2001** |   | **2002** |   |
| Net loss, as  reported                                                                                          |   | $                            | (1,501,867 | ) | $ | (9,594,919 | ) | $ | (14,096,179 | ) |
| Add:  Stock-based employee compensation expense  included in reported net loss, net of related tax effects |   | (4,088,416                   | )          | (3,336,839 | ) | (2,362,591 | ) |
| Pro-forma net  loss                                                                                             |   | $                            | (5,590,283 | ) | $ | (12,931,758 | ) | $ | (16,458,770 | ) |
| Net loss per  share:                                                                                            |   |                         |       |   |   |   |   |
| Basic – as  reported                                                                                       |   | $                            | (0.18      | ) | $ | (1.15 | ) | $ | (1.53 | ) |
| Basic – pro-forma                                                                                          |   | $                            | (0.67      | ) | $ | (1.54 | ) | $ | (1.79 | ) |
| Diluted – as  reported                                                                                     |   | $                            | (0.18      | ) | $ | (1.15 | ) | $ | (1.53 | ) |
| Diluted –  pro-forma                                                                                       |   | $                            | (0.67      | ) | $ | (1.54 | ) | $ | (1.79 | ) |

 

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

 
|                                                            |   | **December  31,**  |   |
|-----------------------------------------------------------------|--------|--------------------|--------|
|                                                            |   | **2000**           |   | **2001** |   | **2002** |   |
|                                                            |   | **Stock  Options** |   | **ESPP** |   | **Stock  Options** |   | **ESPP1** |   | **ESPP2** |   | **Stock  Options** |   | **ESPP1** |   | **ESPP2** |   |
| Risk-free  interest rate                                        |   | 5.06               | %      | 6.17 | % | 3.62 | % | 4.74 | % | 2.91 | % | 2.21 | % | 1.74 | % | 1.60 | % |
| Expected  dividend yield                                        |   | —             |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Expected  volatility                                            |   | 96.96              | %      | 103.4 | % | 108.17 | % | 132.5 | % | 115.8 | % | 114.06 | % | 87.6 | % | 103.3 | % |
| Expected life  (years)                                          |   | 3                  |   | .5 |   | 3 |   | .5 |   | .5 |   | 3 |   | .5 |   | .5 |   |
| Weighted average  fair value of options granted during the year |   | $                  | 25.83  |   | $ | 4.90 |   | $ | 7.13 |   | $ | 5.36 |   | $ | 3.72 |   | $ | 5.32 |   | $ | 2.80 |   | $ | 2.06 |   |
|                                                                 |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

39

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Pro forma net loss reflects only options granted in1995 through 2002.  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.

 

(l) *New Accounting Pronouncements*

 

Statement of Financial Accounting Standards No. 141,“Business Combinations” (“SFAS 141”), issued in June 2001, addresses financialaccounting and reporting for business combinations which were initiated afterJune 30, 2001. This Statement also applies to all business combinationsaccounted for using the purchase method for which the date of acquisition isJuly 1, 2001, or later.

 

Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), issued in June 2001,addresses financial accounting and reporting for acquired goodwill andintangible assets.  The provisions ofSFAS 142 are required to be applied starting with fiscal years beginning afterDecember 15, 2001. Early application is permitted for entities with fiscalyears beginning after March 15, 2001, provided that the first interim financialstatements have not previously been issued. Impairment losses for goodwill andindefinite-lived intangible assets that arise due to the initial application ofthis Statement (resulting from a transitional impairment test) are to bereported as resulting from a change in accounting principle.

 

Statement of Financial Accounting Standards No. 143,“Accounting For Asset Retirement Obligations” (“SFAS 143”), issued in August2001, addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and for the associatedretirement costs.  SFAS 143 whichapplies to all entities that have a legal obligation associated with theretirement of a tangible long-lived asset is effective for fiscal yearsbeginning after June 15, 2001.

 

Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”),issued in October 2001, addresses financial accounting and reporting for the impairmentor disposal of long-lived assets.  SFAS144, which applies to all entities, is effective for fiscal years beginningafter December 15, 2001.

 

The Company adopted SFAS’ 141, 142, 143 and 144 duringthe first quarter of 2002 without a material impact on its financial conditionor results of operations.

 

Statement of Financial Accounting Standards No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections,” effective for fiscal years beginning May15, 2002 or later that rescinds FASB Statement No. 4, Reporting Gains andLosses from Extinguishment of Debt, FASB Statement No. 64, Extinguishments ofDebt Made to Satisfy Sinking-Fund Requirements, and FASB Statement No. 44Accounting 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 other existing authoritative pronouncementsto make various technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The Company does not expect the implementation of SFAS No. 145 to have amaterial impact on the Company’s financial condition or results of operations.

 

40

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Statement of Financial Accounting Standards No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” effectivefor exit or disposal activities that are initiated after December 31,2002.  This Statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date ofcommitment to an exit or disposal plan. The Company does not expect theimplementation of SFAS No. 146 to have a material impact on the Company’sfinancial 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,” 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 annualand interim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.The Company does not expect the implementation of SFAS No. 148 to have amaterial impact on the Company’s financial condition or results of operations.

 

**(3)Accounts Receivable**

 

Accounts receivable consisted of the following atDecember 31:

 
|                                   |   | **2001** |      | **2002** |   |
|----------------------------------------|--------|----------|-----------|----------|--------|
|                                   |   |     |      |     |   |
| Accounts  receivable, trade            |   | $        | 5,830,614 |     | $      | 1,663,560 |   |
| Less: Allowance  for doubtful accounts |   | (65,000  | )         | (65,000  | )      |
|                                   |   | $        | 5,765,614 |     | $      | 1,598,560 |   |

 

Accounts receivable at December 31, 2001 included theshipment of an Ibis 1000 oxygen implanter that was shipped to the ShanghaiInstitute of Metallurgy, Chinese Academy of Sciences against a letter ofcredit.  The revenue from this shipmentwas recognized in 2002 when the oxygen implanter was installed and accepted bythe customer.

 

**(4)Inventories**

 

Inventories consisted of the following at December 31:

 
|               |   | **2001** |      | **2002** |   |
|--------------------|--------|----------|-----------|----------|--------|
|               |   |     |      |     |   |
| Raw materials      |   | $        | 390,345   |     | $      | 810,740 |   |
| Work in process    |   | 262,449  |      | 94,090   |   |
| Finished goods     |   | 882,718  |      | 326,729  |   |
| Total  inventories |   | $        | 1,535,512 |     | $      | 1,231,559 |   |

 

41

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**(5)Property and Equipment**

 

Property and equipmentconsisted of the following at December 31:

 
|                      |   | **2001**  |       | **2002**   |   |
|---------------------------|--------|-----------|------------|------------|--------|
|                      |   |      |       |       |   |
| Machinery and  equipment  |   | $         | 30,642,443 |       | $      | 34,966,085 |   |
| Furniture and  fixtures   |   | 395,017   |       | 395,017    |   |
| Leasehold  improvements   |   | 4,304,834 |       | 4,640,194  |   |
| Construction in  progress |   | 7,697,570 |       | 11,727,363 |   |
|                      |   | $         | 43,039,864 |       | $      | 51,728,659 |   |

 

Fixed assets subject tocapital leases at December 31, 2001 and 2002 were $4,564,835.  Accumulated depreciation for fixed assetssubject to capital leases was $362,609 and $1,879,020 in 2001 and 2002,respectively.

 

Construction inprogress includes implanters under construction that the Company intends to usein its wafer production facility or sell to customers and other expansionprojects.

 

At December 31, 2002, the Company had commitments topurchase approximately $ 1,620,303 in material or subassemblies to be used innormal operations and approximately $380,768 in capital equipment purchasecommitments.

 

**(6)Other Assets**

 

In December 2000, the Company entered into aroyalty-bearing license agreement which gives the Company the right tomanufacture SIMOX-SOI wafers using the licensed process.  Warrants were issued in connection with thisagreement.  The cost of the licenseagreement, including cash paid and the fair value of the warrants issued, is$2,280,000 and is included in other assets at December 31, 2001 and December31, 2002 (see note 13 (c)).

 

**(7)Lease Commitments**

 

In January 1997,the Company entered into a non-cancelable operating lease for its office andmanufacturing facility expiring in 2003 with a five-year renewal option.  In April 2000, the Company entered into anon-cancelable operating lease for an additional manufacturing facilityexpiring in 2005 with a five-year renewal option.  This lease was amended in September 2001 by which Ibis secured anadditional 20,000 square feet of adjacent space for future expansion. TheCompany also leases certain equipment under non-cancelable operating leasesexpiring through 2006, as well as equipment used in operations undernon-cancelable capital leases expiring through 2004.

 

In September 2001Ibis entered into a $4.5 million equipment lease line.  The lease line was used to finance thepurchase of process equipment for wafer production of primarily 300mm wafers ina sale-leaseback transaction bearing interest at approximately 8% with a termof three years and a monthly net payment of approximately $125,000.  Ibis has a fair market value purchase optionat the end of the lease term.  Thelease-line is secured by the underlying assets and all other property andequipment of Ibis. The gain of approximately $36,000 under the sale andleaseback has been deferred and will be amortized as a reduction ofdepreciation expense over the life of the lease. The unamortized amount of thisgain at December 31, 2001 and 2002 was $33,704 and $21,425 respectively.

 

42

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Future minimumlease payments under non-cancelable leases at December 31, 2002, are asfollows:

 
|                                                |   | **Capital  Leases** |      | **Operating  Leases** |   |
|-----------------------------------------------------|--------|---------------------|-----------|-----------------------|--------|
| Year ending:                                        |   |                |      |                  |   |
| 2003                                                |   | $                   | 1,507,317 |                  | $      | 792,032 |   |
| 2004                                                |   | 1,185,746           |      | 404,914               |   |
| 2005                                                |   | —              |      | 184,749               |   |
| 2006                                                |   | —              |      | 18,490                |   |
| Total minimum  lease payments                       |   | $                   | 2,693,063 |                  | $      | 1,400,185 |   |
| Less amount  representing interest                  |   | (7,248              | )         |                  |   |
| Less current  maturities                            |   | (1,501,415          | )         |                  |   |
| Capital lease  obligations, less current maturities |   | $                   | 1,184,400 |                  |   |   |

 

Interest was calculatedusing an imputed interest rate of 8%.

 

Rent expense wasapproximately $447,000, $623,000 and $723,000 for the years ended December 31,2000, 2001 and 2002 respectively.

 

**(8)Accrued Liabilities**

 

Current accrued liabilitieswere as follows at December 31:

 
|                                      |   | **2001** |      | **2002** |   |
|-------------------------------------------|--------|----------|-----------|----------|--------|
|                                      |   |     |      |     |   |
| Billings in  excess of costs on contracts |   | $        | 189,196   |     | $      | — |   |
| Accrued vacation                          |   | 378,051  |      | 464,257  |   |
| Accrued warranty                          |   | 898,232  |      | 925,453  |   |
| Accrued payroll                           |   | 398,579  |      | 418,817  |   |
| Accrued expenses                          |   | 565,898  |      | 586,074  |   |
| Total                                     |   | $        | 2,429,956 |     | $      | 2,394,601 |   |

 

**(9)Deferred Revenue**

 

In April 2000, theCompany received funding from a customer for a capacity reservation.  This capacity reservation has allowed thiscustomer to utilize a purchase credit toward an additional implanter, wafersand spare parts.  In November 2002, theCompany shipped an i2000 implanter to this customer and in December 2002, theCompany received a majority of the proceeds from this sale, net of the capacityreservation applied. This amount is included in deferred revenue, as revenuefrom this shipment will be recognized upon acceptance at the customer’s site.The costs associated with this shipment are included in deferred costs and willalso be recognized upon customer acceptance.

 

Deferred revenue alsoincludes prepaid license and royalty fees.

 

**(10)License Agreements**

 

The Company obtained anexclusive sublicense in the field of oxygen implantation to the proprietarybeam scanning system developed by a consultant to the Company during thedevelopment of the first Ibis 1000 implanter. The beam scanning system sublicense agreement also grants the Companycertain rights to further sublicense the technology for certain applications.  The Company received $141,044, $243,382 and$100,461 in 2000, 2001 and 2002, respectively, for non-refundable option feesor royalty fees in accordance with non-exclusive sublicense agreements.

 

43

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**(11)Income Taxes**

 

Income tax expense consists of state income taxes foreach year.  No federal tax benefit wasrecorded in 2000, 2001 and 2002 due to the existence of unused net operatingloss carryforwards.

 

The tax effects oftemporary differences that give rise to significant portions of deferred taxassets and liabilities are presented below at December 31:

 
|                                                                    |   | **2001**    |       | **2002**    |   |
|-------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| Deferred tax  assets:                                                   |   |        |       |        |   |
| Net operating  loss carryforwards                                       |   | $           | 14,591,000 |        | $      | 20,468,000 |   |
| Accruals not  currently deductible for tax purposes                     |   | 187,000     |       | 250,000     |   |
| General business  tax credit carryforwards                              |   | 1,438,000   |       | 1,967,000   |   |
| Other                                                                   |   | 605,000     |       | 630,000     |   |
| Less: Valuation  allowance                                              |   | (15,503,000 | )          | (22,332,000 | )      |
| Net deferred tax  assets                                                |   | 1,318,000   |       | 983,000     |   |
| Deferred tax  liabilities:                                              |   |        |       |        |   |
| Property and  equipment, principally due to differences in depreciation |   | (1,318,000  | )          | (983,000    | )      |
|                                                                    |   | $           | —     |        | $      | — |   |

 

As a result of the losses incurred to date by theCompany, a 100% valuation allowance has been applied against the Company’sdeferred tax assets.  The amountrecorded as net deferred tax assets as of December 31, 2001 and 2002 representsthe tax benefits of existing deductible temporary differences or carryforwardsthat are more likely than not to be realized through the generation ofsufficient future taxable income within the carryforward period. The net changein the total valuation allowance was an increase of $4,167,000 and $6,829,000for the years ended December 31, 2001 and 2002, respectively.

 

The Company had federal net operating loss and general business creditcarryovers of approximately $49,812,000 and $1,034,000, respectively, atDecember 31, 2002, that may be used to offset future taxable income, if any,through 2022.    Deferred tax assets andrelated valuation allowance of $2,799,000 related to the net operating losscarryforward results from the exercise of employee stock options, the taxbenefit of which, when recognized, will be accounted for as a credit toadditional paid-in capital rather than a reduction of income tax expense.  Net operating loss carryforwards and othertax attributes may be limited in the event of certain changes in ownershipinterests.

# ** **

**(12)Capitalization**

 

The Company has50,000,000 shares of common stock and 2,000,000 shares of preferred stock(“Undesignated Preferred Stock”) authorized. At December 31, 2002**,**160,496, 1,218,125, and 200,000 commonshares were reserved for issuance upon exercise of options outstanding oravailable for grant under the Company’s 1993 Employee, Director and ConsultantStock Option Plan, 1997 Employee, Director and Consultant Stock Option Plan,and for exercises of warrants, respectively.

 

In March 2002, Ibis completed a public offering of900,000 shares of Common Stock at $13 per share, and on April 1, 2002, 100,000shares were exercised as an over allotment option by the underwriter.  Net proceeds to the Company wereapproximately $12,100,000.

 

44

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**(13)Stock Plans and Warrants**

 

(a) *Stock Option Plans*

 

In December 1993, the Board of Directors andstockholders approved the adoption of the Company’s 1993 Employee, Director andConsultant Stock Option Plan which provided for the issuance of options topurchase up to 250,000 shares of common stock to employees, consultants andnon-employee directors.  In May 1996,the stockholders increased to 750,000 shares the aggregate number of sharesthat may be granted under this plan.

 

In October 1997, theBoard of Directors approved the adoption of the Company’s 1997 Employee,Director and Consultant Stock Option Plan (the “1997 Plan”) which provides forthe issuance of options to purchase up to 750,000 shares of common stock of theCompany to employees, consultants and non-employee directors.  The stockholders approved the Plan at theMay 1998 Annual Stockholders Meeting. In February 2001, the Board of Directors approved an amendment to the1997 Plan to increase the aggregate number of shares reserved for issuance to1,350,000. The stockholders approved this amendment at the May 2001 AnnualStockholders Meeting.

 

A summary of stock optionactivity under the plans is as follows:

 
|                                      |   | **Number  of  shares** |   | **Weighted  average  exercise price  of shares** |   |
|-------------------------------------------|--------|------------------------|--------|--------------------------------------------------|--------|
| Options  outstanding at December 31, 1999 |   | 652,834                |   | $                                                | 11.64  |   |
| Granted                                   |   | 264,000                |   | 41.21                                            |   |
| Exercised                                 |   | (127,668               | )      | 8.39                                             |   |
| Cancelled                                 |   | (11,894                | )      | 20.43                                            |   |
| Options  outstanding at December 31, 2000 |   | 777,272                |   | 22.08                                            |   |
| Granted                                   |   | 273,272                |   | 10.24                                            |   |
| Exercised                                 |   | (40,330                | )      | 8.51                                             |   |
| Cancelled                                 |   | (37,048                | )      | 28.58                                            |   |
| Options  outstanding at December 31, 2001 |   | 973,166                |   | 19.08                                            |   |
| Granted                                   |   | 225,150                |   | 7.24                                             |   |
| Exercised                                 |   | —                 |   | —                                           |   |
| Cancelled                                 |   | (15,812                | )      | 16.61                                            |   |
| Options  outstanding at December 31, 2002 |   | 1,182,504              |   | $                                                | 16.86  |   |
|                                      |   |                   |   |                                             |   |
| Options  exercisable at December 31, 2002 |   | 599,054                |   | $                                                | 17.87  |   |

 

The following table summarizes information concerningoutstanding and exercisable options as of December 31, 2002:

 
|                                                                                             |   | **Options  Outstanding** |   | **Options  Exercisable**                                    |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------------------------------------------|--------|
| **Range of  exercise prices**                                                                    |   | **Number  outstanding**  |   | **Weighted  average  remaining  contractual  life (years)** |   | **Weighted  average  outstanding  option price** |   | **Number  exercisable** |   | **Weighted  average  exercise  price** |   |
| $ .08        -        6.00 |   | 166,684                  |   | 9.3                                                         |   | $ | 5.97 |   | 6,084 |   | $ | 5.92 |   |
| $ 6.01      -        9.00            |   | 292,973                  |   | 7.4                                                         |   | $ | 7.92 |   | 141,644 |   | $ | 7.86 |   |
| $ 9.01      -        3.50            |   | 376,722                  |   | 6.3                                                         |   | $ | 10.56 |   | 267,139 |   | $ | 10.44 |   |
| $ 13.51    -      20.26                                  |   | 86,425                   |   | 7.9                                                         |   | $ | 17.96 |   | 38,587 |   | $ | 17.57 |   |
| $ 20.27    -      30.37                                  |   | 12,250                   |   | 7.0                                                         |   | $ | 24.07 |   | 8,750 |   | $ | 23.95 |   |
| $ 30.38    -      45.55                                  |   | 79,750                   |   | 7.3                                                         |   | $ | 35.87 |   | 52,000 |   | $ | 35.90 |   |
| $ 45.56    -      68.32                                  |   | 163,700                  |   | 7.0                                                         |   | $ | 46.49 |   | 82,850 |   | $ | 46.48 |   |
| $ 68.33    -      98.71                                  |   | 4,000                    |   | 7.2                                                         |   | $ | 80.55 |   | 2,000 |   | $ | 80.55 |   |
|                                                                                             |   | 1,182,504                |   |                                                        |   |   |   | 599,054 |   |   |   |

 

45

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(b) *Employee Stock Purchase Plan*

 

OnFebruary 24, 2000, the Board of Directors adopted the Ibis TechnologyCorporation 2000 Employee Stock Purchase Plan (the “Purchase Plan”) pursuant towhich a total of 300,000 shares of the Company’s Common Stock may be sold toeligible employees of the Company at a 15% discount from the market value ofthe shares. Under the terms of the Purchase Plan, employees may elect to haveup to 15% of their base earnings withheld to purchase these shares during eachoffering period, which is a six-month period.

The purchase price underthe Purchase Plan is 85% of the lesser of the market price on the beginning orthe ending of the offering period. Approximately 55% of eligible employeesparticipated in the Purchase Plan in the initial offering period, 65% in 2001and 74% in 2002.  During 2000, 2001, and2002, the Company sold 14,161, 38,176 and 62,702 shares, respectively, toemployees under the Purchase Plan. The stockholders approved the Purchase Planat the May 2000 Annual Stockholders Meeting.

 

(c) *Warrants*

 

During 2000, 38,263Warrants were exercised.  Since some ofthese Warrants were exercised on a cashless basis, 35,840 shares of CommonStock were issued.  At December 31,2000, there were additional warrants outstanding to purchase 1,392 shares ofcommon stock at $8.40 per share.  Theseremaining warrants expired in 2001.

 

In December 2000, theCompany issued warrants to purchase 200,000 shares of common stock at $22.30per share in connection with a license agreement.  The value of the warrants is included in other assets (see note6) and was calculated using the Black-Scholes option-pricing model with thefollowing assumptions: expected volatility of 93.69%, risk-free interest rateof 5.50%, and an expected life of 5 years. At December 31, 2002, there were 200,000 warrants outstanding.

 

**(14)Significant Customers and Concentration of Business Risk**

 

The Company sells itsproducts to a limited number of semiconductor and optical componentsmanufacturers primarily in the United States, the Pacific Rim and the UnitedKingdom.

 

Government sales and other significant customers areshown in dollar amounts and as a percentage of total revenue as follows:

 
|               |   | **Government** |    | **Other** |   |                       |   | **Total**  |   |
|--------------------|--------|----------------|---------|-----------|--------|----------------------------|--------|------------|--------|
| **Year Ended**     |   | **Amount**     |    | **%**     |   | **Significant  Customers** |   | **Amount** |   | **%** |   | **Amount** |   | **%** |   |
|               |   |           |    |      |   |                       |   |       |   |   |   |   |   |   |   |
| December 31,  2000 |   | $              | 678,000 |      | 5      | %                          | 2      |       | $      | 11,329,000 |   | 79 | % | $ | 12,007,000 |   | 84 | % |
| December 31,  2001 |   | $              | 621,000 |      | 8      | %                          | 3      |       | $      | 4,191,000 |   | 56 | % | $ | 4,812,000 |   | 65 | % |
| December 31,  2002 |   | $              | 137,000 |      | 1      | %                          | 2      |       | $      | 10,187,000 |   | 73 | % | $ | 10,324,000 |   | 74 | % |

 

Accounts receivable fromgovernment sales amounted to approximately $280,000 and $30,000 at December 31,2001 and 2002, respectively. Accounts receivable from significant customersamounted to $428,000 and $769,000 at December 31, 2001 and 2002, respectively.

 

Export sales tounaffiliated customers in 2000, 2001 and 2002 were 47%, 52% and 56% of totalrevenues, respectively.

 

During 2000, 2001and 2002, the Company purchased substantially all of its conventional bulksilicon wafers and certain raw materials, components and subassemblies for itsimplanters from a limited group of suppliers. Disruption or termination ofcertain of these sources could occur and such disruptions could have a materialadverse effect on the Company’s business and results of operations.

 

46

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**(15) Other Income**

 

In 2001, the Companyrecognized a non-recurring gain in other income of approximately $1.4 millionwhich is the result of an expired wafer production capacity option that wasentered into in September 1995.  Underthis agreement, a customer advanced non-refundable cash to the Company to ensurededicated wafer production capacity over a five-year period.  As wafers were produced, amounts wererecognized in revenue over this five-year period, which ended December2000.  During 2001 Ibis completed itsnegotiations with this customer and decided not to extend the agreementfurther.  Accordingly, the remainingamount deferred under this agreement was recognized in income, as no furtherobligations exist.

 

**(16)Industry Segments**

 

The Company adopted SFASNo. 131, “Disclosures about Segments of an Enterprise and Related Information”during 1998.  SFAS No. 131 establishedthe standards for reporting information about operating segments in annualfinancial statements and requires selected information about operating segmentsin interim financial reports issued to stockholders.

 

The Company’s reportablesegments are SIMOX Wafer Products, SIMOX Equipment and Other Products orServices.  For purposes of segmentreporting, equipment spares and field service revenue are combined and reportedas SIMOX Equipment. Government contracts, other services and license revenueare combined and reported as Other Products or Services.

 

The accounting policiesof the operating segments are the same as those described in the summary ofsignificant accounting policies.  TheCompany generally evaluates operating performance based on income or lossbefore interest and taxes.

 

The table below providesinformation for the years ended December 31, 2000, 2001 and 2002 pertaining tothe Company’s three industry segments.

** **
|                                                            |   | **SIMOX****Wafer  Products** |      | **SIMOX  Equipment** |   | **Other Products  or Services** |   | **Total**   |    |
|-----------------------------------------------------------------|--------|------------------------------|-----------|----------------------|--------|---------------------------------|--------|-------------|---------|
| **Net Revenues**                                                |   |                         |      |                 |   |                            |   |        |    |
| Year Ended  December 31, 2000                                   |   | $                            | 8,173,095 |                 | $      | 5,769,393                       |   | $           | 532,395 |   | $ | 14,474,883 |   |
| Year Ended  December 31, 2001                                   |   | 5,390,860                    |      | 1,525,317            |   | 518,379                         |   | 7,434,556   |    |
| Year Ended  December 31, 2002                                   |   | 7,646,307                    |      | 6,102,748            |   | 282,979                         |   | 14,032,034  |    |
|                                                            |   |                         |      |                 |   |                            |   |        |    |
| **Operating  Income (Loss)**                                    |   |                         |      |                 |   |                            |   |        |    |
| Year Ended  December 31, 2000                                   |   | 774,010                      |      | (2,363,418           | )      | 144,076                         |   | (1,445,332  | )       |
| Year Ended  December 31, 2001                                   |   | (5,690,297                   | )         | (4,037,328           | )      | 142,008                         |   | (9,585,617  | )       |
| Year Ended December  31, 2002                                   |   | (8,952,392                   | )         | (3,391,162           | )      | 167,838                         |   | (12,175,716 | )       |
|                                                            |   |                         |      |                 |   |                            |   |        |    |
| **Assets**                                                      |   |                         |      |                 |   |                            |   |        |    |
| December 31,  2000                                              |   | 17,587,720                   |      | 11,478,915           |   | 56,686                          |   | 29,123,321  |    |
| December 31,  2001                                              |   | 32,179,004                   |      | 8,797,202            |   | 99,405                          |   | 41,075,611  |    |
| December 31, 2002                                               |   | 33,259,578                   |      | 5,501,872            |   | 546,948                         |   | 39,308,398  |    |
|                                                            |   |                         |      |                 |   |                            |   |        |    |
| **Capital  Expenditures**                                       |   |                         |      |                 |   |                            |   |        |    |
| Year Ended  December 31, 2000                                   |   | 10,110,169                   |      | 812,850              |   | —                          |   | 10,923,019  |    |
| Year Ended  December 31, 2001                                   |   | 5,801,261                    |      | 335,949              |   | —                          |   | 6,137,210   |    |
| Year Ended December  31, 2002                                   |   | 8,409,457                    |      | 134,089              |   | —                          |   | 8,543,546   |    |
|                                                            |   |                         |      |                 |   |                            |   |        |    |
| **Depreciation  and Amortization****of Property and Equipment** |   |                         |      |                 |   |                            |   |        |    |
| Year Ended  December 31, 2000                                   |   | 1,393,259                    |      | 159,233              |   | 3,656                           |   | 1,556,148   |    |
| Year Ended  December 31, 2001                                   |   | 2,967,751                    |      | 536,670              |   | —                          |   | 3,504,421   |    |
| Year Ended  December 31, 2002                                   |   | 4,648,649                    |      | 1,478,767            |   | —                          |   | 6,127,416   |    |
|                                                                 |        |                              |           |                      |        |                                 |        |             |         |  |  |  |  |

# ** **

47

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The table below providesthe reconciliation of reportable segment operating income (loss), assets, capitalexpenditures, and depreciation and amortization to the Company’s totals.

 
|                                                          |   | **Years Ended December 31,** |       |
|---------------------------------------------------------------|--------|------------------------------|------------|
| **Segment  Reconciliation**                                   |   | **2000**                     |       | **2001** |   | **2002** |   |
| Loss Before Income Taxes:                                     |   |                         |       |   |   |   |   |
| Total operating loss for reportable segments                  |   | $                            | (1,445,332 | ) | $ | (9,585,617 | ) | $ | (12,175,716 | ) |
| Corporate general & administrative expenses               |   | (1,998,303                   | )          | (2,273,077 | ) | (2,174,198 | ) |
| Net other income                                              |   | 1,943,024                    |       | 2,265,031 |   | 254,991 |   |
| Loss before income taxes                                      |   | $                            | (1,500,611 | ) | $ | (9,593,663 | ) | $ | (14,094,923 | ) |
|                                                          |   |                         |       |   |   |   |   |
| Assets:                                                       |   |                         |       |   |   |   |   |
| Total assets for reportable segments                          |   | $                            | 29,123,321 |   | $ | 41,075,611 |   | $ | 39,308,398 |   |
| Cash & cash equivalents not allocated to segments         |   | 26,366,299                   |       | 13,087,799 |   | 11,745,918 |   |
| Other unallocated assets                                      |   | 808,904                      |       | 756,894 |   | 644,643 |   |
| Total assets                                                  |   | $                            | 56,298,524 |   | $ | 54,920,304 |   | $ | 51,698,959 |   |
|                                                          |   |                         |       |   |   |   |   |
| Capital Expenditures:                                         |   |                         |       |   |   |   |   |
| Total capital expenditures for reportable segments            |   | $                            | 10,923,019 |   | $ | 6,137,210 |   | $ | 8,543,546 |   |
| Corporate capital expenditures                                |   | 288,670                      |       | 236,571 |   | 145,250 |   |
| Total capital expenditures                                    |   | $                            | 11,211,689 |   | $ | 6,373,781 |   | $ | 8,688,796 |   |
|                                                          |   |                         |       |   |   |   |   |
| Depreciation and Amortization:                                |   |                         |       |   |   |   |   |
| Total depreciation & amortization for reportable segments |   | $                            | 1,556,148  |   | $ | 3,504,421 |   | $ | 6,127,416 |   |
| Corporate depreciation & amortization                     |   | 106,390                      |       | 128,243 |   | 137,133 |   |
| Total depreciation & amortization                         |   | $                            | 1,662,538  |   | $ | 3,632,664 |   | $ | 6,264,549 |   |

 

**(17) Selected Quarterly FinancialData (Unaudited)**

 

The Table below provides information for the years2000, 2001 and 2002.

 
|                       |   | **First  Quarter** |      | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |      |
|----------------------------|--------|--------------------|-----------|---------------------|--------|--------------------|--------|---------------------|-----------|
| **2000**                   |   |               |      |                |   |               |   |                |      |
| Total sales and  revenue   |   | $                  | 2,039,112 |                | $      | 5,920,230          |   | $                   | 2,521,588 |   | $ | 3,993,953 |   |
| Gross profit  (loss)       |   | 921,594            |      | 1,852,266           |   | 690,358            |   | 1,316,669           |      |
| Loss from  operations      |   | (865,255           | )         | (513,472            | )      | (1,267,169         | )      | (797,739            | )         |
| Net loss                   |   | (371,299           | )         | (23,184             | )      | (798,042           | )      | (309,342            | )         |
| Net loss per  common share |   | (0.05              | )         | 0.00                |   | (0.10              | )      | (0.03               | )         |
| **2001**                   |   |               |      |                |   |               |   |                |      |
| Total sales and  revenue   |   | $                  | 3,200,505 |                | $      | 1,256,418          |   | $                   | 1,443,827 |   | $ | 1,533,806 |   |
| Gross profit  (loss)       |   | 1,089,664          |      | (957,856            | )      | (1,763,430         | )      | (1,022,089          | )         |
| Loss from  operations      |   | (1,126,293         | )         | (3,300,621          | )      | (3,972,858         | )      | (3,458,922          | )         |
| Net loss                   |   | (785,158           | )         | (3,048,554          | )      | (2,405,480         | )      | (3,355,727          | )         |
| Net loss per  common share |   | (0.09              | )         | (0.37               | )      | (0.29              | )      | (0.40               | )         |
| **2002**                   |   |               |      |                |   |               |   |                |      |
| Total sales and  revenue   |   | $                  | 1,625,346 |                | $      | 1,857,991          |   | $                   | 7,729,976 |   | $ | 2,818,721 |   |
| Gross profit  (loss)       |   | (1,489,154         | )         | (1,556,248          | )      | 151,089            |   | (1,513,772          | )         |
| Loss from  operations      |   | (3,846,027         | )         | (4,124,533          | )      | (2,337,936         | )      | (4,041,418          | )         |
| Net loss                   |   | (3,786,562         | )         | (4,027,840          | )      | (2,272,591         | )      | (4,009,186          | )         |
| Net loss per  common share |   | (0.44              | )         | (0.43               | )      | (0.24              | )      | (0.42               | )         |

 

48

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**Item9.****                                   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

**PART III**

 

**Item10.****                            DIRECTORSAND OFFICERS OF THE REGISTRANT**

 

The Response tothis item is incorporated by reference from the discussion responsive theretounder the captions “Management” and “Section 16(a) Beneficial OwnershipReporting Compliance” in the Company’s Proxy Statement for the 2003 AnnualMeeting of Stockholders.

 

 

**Item11.****                            EXECUTIVECOMPENSATION**

 

The response tothis item is incorporated by reference from the discussion responsive theretounder the caption “Executive Compensation” in the Company’s Proxy Statement forthe 2003****AnnualMeeting of Stockholders.

 

**Item12.****                            SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The response tothis item is incorporated by reference from the discussion responsive theretounder the caption “Share Ownership” in the Company’s Proxy Statement for the2003 Annual Meeting of Stockholders.

 

**Item13.****                            CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The response tothis item is incorporated by reference from the discussion responsive theretounder the captions “Certain Transactions” and “ExecutiveCompensation—Employment Contracts and Change of Control Arrangements” in theCompany’s Proxy Statement for the 2003 Annual Meeting of Stockholders.

 

**Item14.****                            DISCLOSURECONTROLS AND PROCEDURES**

 

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our reports filed with the Securities and ExchangeCommission (“SEC”) is recorded, processed, summarized, and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to our management, including our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriateto allow timely decisions regarding required disclosure.

 

(a)  Within 90 days prior to the filing of thisAnnual Report on Form 10-K, our CEO and CFO carried out an evaluation of theeffectiveness of our disclosure controls and procedures. Based upon thisevaluation, the CEO and CFO concluded that our disclosure controls andprocedures are effective in:

 

•                  Accumulatingand communicating information to our management, including the CEO and CFO, toallow timely decisions regarding required disclosure; and

•                  Recording,processing, summarizing and reporting information required to be included inour periodic reports filed with the SEC in a timely manner.

 

(b)  There have been no significant changes inour internal controls or in other factors since the date of the evaluation ofthe CEO and CFO that could significantly affect internal controls, includingany corrective actions with regard to significant deficiencies and materialweaknesses.

 

49

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| **Item 15.**               |   | **EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM  8-K**                                                                                                                                                                                                                                           |
|----------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |   |                                                                                                                                                                                                                                                                                                           |
| **Item 15(a).**            |   | The following documents  are filed as part of this annual report on Form 10-K.                                                                                                                                                                                                                                 |
|                       |   |                                                                                                                                                                                                                                                                                                           |
| **Item 15(a)(1)  and (2)** |   | See “Index to Financial  Statements and Financial Statement Schedule” at Item 8 to this Annual Report  on Form 10-K.  Other financial  statement schedules have not been included because they are not applicable or  the information is included in the financial statements or notes thereto. |

 

50

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**Item 15(a)(3)**         Exhibits

 

The following is alist of exhibits filed as part of this Annual Report on Form 10-K.

 
| **Exhibit  Number** |   |   | **Description**                                                                                                                                                                                                                                              |
|---------------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |   | -      | Restated Articles of Organization of Registrant  (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the  Quarter Ended September 30, 2000 and incorporated herein by reference)                                                   |
| 3.1.1               |   | -      | Articles of Amendment to the Restated Articles of  Organization of the Registrant (Filed as Exhibit 3.1.1 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2000 and  incorporated herein by reference)               |
| 3.1.2               |   | -      | Articles of Amendment to the Restated Articles of  Organization of the Registrant (Filed as Exhibit 3.1.2 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2000 and  incorporated herein by reference)               |
| 3.2                 |   | -      | Restated By-Laws of the Registrant, as amended  (Filed as Exhibit 3.2*)                                                                                                                                                                                      |
| 4.1                 |   | -      | Article 4 of Restated Articles of Organization  (Filed as Exhibit 4.1*)                                                                                                                                                                                      |
| 4.2                 |   | -      | Form of Common Stock Certificate (Filed as Exhibit  4.2*)                                                                                                                                                                                                    |
| 10.1                |   | -      | Master Agreement, dated as of August 7, 1992, among  the Registrant, Dr. Hilton Glavish, and Zimec, Inc. (Filed as Exhibit 10.1*)                                                                                                                            |
| 10.2                |   | -      | Sublicense Agreement, dated December 21, 1993, among  the Registrant, Dr. Hilton Glavish, and Zimec, Inc. (Filed as Exhibit 10.2*)                                                                                                                           |
| @10.3               |   | -      | Business Development Agreement, dated as of July 15,  1994, between the Registrant and Mitsubishi Materials Corporation (Filed as  Exhibit 10.3*)                                                                                                            |
| 10.4                |   | -      | Lease Agreement, dated December 22, 1987, as  amended, between the Registrant and Thomas J. Flatley d/b/a The Flatley  Company  (“Flatley”) (Filed as Exhibit  10.4*)                                                                         |
| 10.4A               |   | -      | Fifth Amendment to Lease Agreement, dated February  4, 1997 between the Registrant and Flatley (Filed as Exhibit 10.4 to the  Registrant’s Quarterly Report on Form 10-Q for the Quarter ended March 31,  1997 and Incorporated herein by reference).   |
| 10.5                |   | -      | Form of Noncompetition, Nondisclosure and Assignment  of Inventions Agreement between the Registrant and each current employee of  the Registrant (Filed as Exhibit 10.11*)                                                                                  |
| †10.6          |   | -      | Ibis Technology Corporation 1993 Employee, Director  and Consultant Stock Option Plan as amended (Filed as Exhibit 10.15 to the  Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1996  and Incorporated herein by reference)     |
| †10.7          |   | -      | Form of Stock Option Agreement under 1993 Employee,  Director and Consultant Stock Option Plan (Filed as Exhibit 10.16*)                                                                                                                                     |
| †10.8          |   | -      | 1995/1996 Incentive Compensation Plan of the  Registrant (Filed as Exhibit 10.17*)                                                                                                                                                                           |
| @10.9               |   | -      | Capacity Option Agreement, dated September 21, 1995,  between Registrant and Motorola Corporation (Filed as Exhibit 10.18*)                                                                                                                                  |
| 10.10               |   | -      | Exclusive Patent License Agreement, dated November  1, 1994, between the Registrant and Superion Limited (Filed as Exhibit  10.26*)                                                                                                                          |
| 10.11               |   | -      | License Agreement, dated as of September 1, 1994,  between the Registrant and Nissin Electric Co., Ltd. (Filed as Exhibit  10.27*)                                                                                                                           |
| 10.12               |   | -      | Equipment Purchase Master Agreement, dated as of May  22, 1996, between Registrant, and IBM (Filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K/A (File No.0-13078) filed on September 12, 1996  and incorporated herein by reference). |

 

51

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| **Exhibit  Number** |   |   | **Description**                                                                                                                                                                                                                                                                                                                   |
|---------------------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.13         |   | -      | Ibis Technology Corporation 1997 Employee, Director  and Consultant Stock Option Plan (Filed as Exhibit 99.1 to the Company’s Form  S-8 (File No. 333-45247) filed on January 30, 1998 and incorporated herein by  reference).                                                                                               |
| @10.14              |   | -      | Task Order dated April 10, 1998, between the  Registrant and International Business Machines Corporation (“IBM”) (Filed as  Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 1998 and incorporated herein by reference).                                               |
| @10.15              |   | -      | Licensing and Development Agreement, dated June 9, 1998,  between the Registrant and IBM (Filed as Exhibit 10.41 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998 and  incorporated herein by reference)                                                                                  |
| 10.16               |   | -      | Sixth Amendment to Lease dated July 16, 1998,  amending Lease Agreement dated December 22, 1987 between the Company and  Thomas J. Flatley d/b/a the Flatley Company (Filed as Exhibit 10.42 to the  Company’s Quarterly Report on Form 10-Q for the Quarter Ended September 30,  1998 and incorporated herein by reference) |
| †10.17         |   | -      | Change of Control Agreement, dated September 20,  1999, between the Registrant and Martin J. Reid (Filed as Exhibit 10.43 to  the Company’s Annual Report on Form 10-K for the Year Ended December 31, 1999  and incorporated herein by reference)                                                                           |
| †10.18         |   | -      | Change of Control Agreement, dated September 20,  1999, between the Registrant and Debra L. Nelson (Filed as Exhibit 10.44 to  the Company’s Annual Report on Form 10-K for the Year Ended December 31, 1999  and incorporated herein by reference)                                                                          |
| @10.19              |   | -      | License Agreement dated July 1, 1999, between the  Registrant and Mitsubishi Materials Silicon Corporation (Filed as Exhibit  10.45 to the Company’s Annual Report on Form 10-K for the Year Ended December  31, 1999 and incorporated herein by reference)                                                                  |
| 10.20               |   | -      | Lease Agreement, dated April 14, 2000, between the  Registrant and Flatley (Filed as Exhibit 10.46 to the Company’s Quarterly  Report on Form 10-Q for the Quarter Ended June 30, 2000 and incorporated  herein by reference)                                                                                                |
| 10.21               |   | -      | Ibis Technology Corporation 2000 Employee Stock  Purchase Plan (Filed as Exhibit 99.1 to the Company’s Form S-8 (File No.  333-36706) filed on May 10, 2000 and incorporated herein by reference)                                                                                                                            |
| @10.22              |   | -      | Advantox 150 License Agreement dated November 1,  2000, between the Registrant and Mitsubishi Materials Silicon Corporation  (Filed as Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the  Year Ended December 31, 2000 and incorporated herein by reference)                                                 |
| †10.23         |   | -      | Employment Agreement, dated December 27, 2000  between the Registrant and Martin J. Reid (Filed as Exhibit 10.49 to the  Company’s Annual Report on Form 10-K for the Year Ended December 31, 2000 and  incorporated herein by reference)                                                                                    |
| @10.24              |   | -      | License Agreement dated December 15, 2000, between  the Registrant and International Business Machines Corporation (“IBM”) (Filed  as Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the Year  Ended December 31, 2000 and incorporated herein by reference)                                        |
| 10.25               |   | -      | Patent License Agreement dated December 15, 2000,  between the Registrant and IBM (Filed as Exhibit 10.51 to the Company’s  Annual Report on Form 10-K for the Year Ended December 31, 2000 and  incorporated herein by reference)                                                                                           |
| 10.26               |   | -      | Stock Purchase Warrant Agreement dated December 15,  2000, between the Registrant and IBM (Filed as Exhibit 10.52 to the Company’s  Annual Report on Form 10-K for the Year Ended December 31, 2000 and  incorporated herein by reference)                                                                                   |

 

52

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| **Exhibit  Number** |   |   | **Description**                                                                                                                                                                                                                                                                                                                                              |
|---------------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.27               |   | -      | Amendment of Lease Agreement dated September 25,  2001, between the Company and Thomas J. Flatley d/b/a the Flatley  Company.  (Filed as Exhibit 10.53 to  the Company’s Quarterly Report on Form 10-Q for the Quarter Ended September  30, 2001 and incorporated herein by reference)                                                             |
| 10.28               |   | -      | Master Lease Agreement dated September 25, 2001,  between the Company and Heller Financial Leasing, Inc., including additional  Collateral Rider and Schedule A to Additional Collateral Rider. (Filed as  Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q for the Quarter  Ended September 30, 2001 and incorporated herein by reference) |
| 10.29               |   | -      | Amendment to Warrant Agreement dated June 1, 2001  between the Company and International Business Machines Corporation.  (Filed as Exhibit 10.55 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2001 and  incorporated herein by reference)                                                                   |
| #10.30              |   |   | Amended and Restated License Agreement dated  November 14, 2002, between the Registrant and IBM                                                                                                                                                                                                                                                              |
| 10.31               |   |   | Amendment to the Patent License Agreement dated  November 14, 2002, between the Registrant and IBM                                                                                                                                                                                                                                                           |
| 11                  |   | -      | Statement regarding computation of per share income  (loss)                                                                                                                                                                                                                                                                                                  |
| 23                  |   | -      | Consent and Report on Financial Statement Schedule  of KPMG LLP                                                                                                                                                                                                                                                                                              |

 

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*                                         Previouslyfiled with the Commission as Exhibits to, and incorporated herein by referencefrom, the Company’s Registration Statement filed on Form S-1, File No.333-1174, effective April 2, 1996.

 

@                                    Confidentialtreatment previously obtained from the Securities and Exchange Commission. Theportions of the document for which confidential treatment has been granted aremarked “Confidential” and such confidential portions have been filed separatelywith the Securities and Exchange Commission.

 

#                                         Confidentialtreatment requested from the Securities and Exchange Commission. The portionsof the document for which confidential treatment has been granted are marked“Confidential” and such confidential portions have been filed separately withthe Securities and Exchange Commission.

 

†                                          Managementcontract or compensatory plan, contract or arrangement.

 

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

 

(B) *FinancialStatement Schedules*

 

Schedule II — Valuation and Qualifying Accounts

 

**Item15(b)****                **Reports onForm 8-K

 

None.

 

53

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###### **SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, inDanvers, Massachusetts on March 12, 2003.

 
|   | **IBIS TECHNOLOGY CORPORATION** |
|--------|---------------------------------|
|   |                            |   |
|   | By:                             | /s/ Martin J. Reid |   |
|   |                            | Martin J. Reid |
|   |                            | President |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the registrant and in thecapacities indicated and on the dates indicated.

 
| **Signatures** |                                    | **Title** |                                                                                         | **Date** |
|----------------|-----------------------------------------|-----------|----------------------------------------------------------------------------------------------|----------|
|           |                                    |      |                                                                                         |     |
| By:            |  /s/ Martin J.  Reid               |      | President, Chief  Executive Officer  and Chairman (principal executive officer) and Director |     | March 12, 2003 |
|           | Martin J. Reid                          |      |                                                                                         |     |
|           |                                    |      |                                                                                         |     |   |
| By:            |  /s/ Debra L.  Nelson              |      | Chief Financial  Officer,  Treasurer, Clerk, (principal financial and accounting officer)    |     | March 12, 2003 |
|           | Debra L. Nelson                         |      |                                                                                         |     |
|           |                                    |      |                                                                                         |     |   |
| By:            |  /s/ Dimitri A.  Antoniadis, Ph.D. |      | Director                                                                                     |     | March 12, 2003 |
|           | Dimitri A. Antoniadis,  Ph.D.           |      |                                                                                         |     |   |
|           |                                    |      |                                                                                         |     |   |
| By:            |  /s/ Robert L.  Gable              |      | Director                                                                                     |     | March 12, 2003 |
|           | Robert L. Gable                         |      |                                                                                         |     |   |
|           |                                    |      |                                                                                         |     |   |
| By:            |  /s/ Leslie B.  Lewis              |      | Director                                                                                     |     | March 12, 2003 |
|           | Leslie B. Lewis                         |      |                                                                                         |     |   |
|           |                                    |      |                                                                                         |     |
| By:            |  /s/ Donald  McGuinness            |      | Director                                                                                     |     | March 12, 2003 |
|           | Donald McGuinness                       |      |                                                                                         |     |   |
|           |                                    |      |                                                                                         |     |
| By:            |  /s/ Lamberto  Raffaelli           |      | Director                                                                                     |     | March 12, 2003 |
|           | Lamberto Raffaelli                      |      |                                                                                         |     |   |

 

54

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**CERTIFICATIONS**

** **

I, Martin J. Reid, Presidentand Chief Executive Officer, certify that:

 

1. I have reviewed thisannual report on Form 10-K of Ibis Technology Corporation;

 

2. Based on my knowledge, thisannual report does not contain any untrue statement of a material fact or omitto state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

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

 

c) presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | March 12,  2003 |   |                                   |   | /s/  Martin J. Reid |   |
|--------|----------------------|--------|----------------------------------------|--------|---------------------|--------|
|   |                 |   | Martin  J. Reid                        |
|   |                 |   | President  and Chief Executive Officer |

 

55

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**CERTIFICATIONS**

 

I, Debra L. Nelson, ChiefFinancial Officer, certify that:

 

1. I have reviewed thisannual report on Form 10-K of Ibis Technology Corporation;

 

2. Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

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

 

c) presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | March 12,  2003 |   |                     |   | /s/  Debra L. Nelson |   |
|--------|----------------------|--------|--------------------------|--------|----------------------|--------|
|   |                 |   | Debra  L. Nelson         |
|   |                 |   | Chief  Financial Officer |

 

56

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**CERTIFICATION PURSUANT TOSECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

 

Pursuantto Section 1350, Chapter 63 of Title 18, United States Code, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of theundersigned President & Chief Executive Officer and Chief Financial Officerof the Company, certifies, that to their knowledge:

 

1)  theCompany’s Form 10-K for the year ended December 31, 2002 fully complies withthe requirements of Section 13(a) or 15(d) of the Securities Exchange Act of1934 (15 U.S.C. 78m or 78*o*(d)); and

 

2)    the information contained in the Company’sForm 10-K for the year ended December 31, 2002 fairly presents, in all materialrespects, the financial condition and results of operations of the Company.

 

 
| /s/Martin J. Reid                       |   |                            | /s/ Debra L. Nelson |   |   |
|-----------------------------------------|--------|---------------------------------|---------------------|--------|--------|
| Martin J. Reid                          |   | Debra L. Nelson                 |                |
| President & Chief Executive Officer |   | Chief Financial Officer         |                |
|                                    |   |                            |                |
| Date:  March 12, 2003         |   | Date:  March 12, 2003 |                |

 

57

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**SCHEDULEII**

 

**IBIS TECHNOLOGY CORPORATION**

**VALUATION AND QUALIFYING ACCOUNTS**

 

**For the Years Ended December 31, 2000, 2001 and 2002**

 
| **Description**                     |   | **Balance at  Beginning of  Period** |   | **Charged  to Expense** |   | **Amounts  written off** |   | **Balance at  end of  Period** |   |
|-------------------------------------|--------|--------------------------------------|--------|-------------------------|--------|--------------------------|--------|--------------------------------|--------|
| Allowance for  Doubtful Accounts    |   |                                 |   |                    |   |                     |   |                           |   |
| December 31,  2000                  |   | 65,000                               |   | —                  |   | —                   |   | 65,000                         |   |
| December 31,  2001                  |   | 65,000                               |   | —                  |   | —                   |   | 65,000                         |   |
| December 31,  2002                  |   | 65,000                               |   | —                  |   | —                   |   | 65,000                         |   |
|                                |   |                                 |   |                    |   |                     |   |                           |   |
| Reserve for  Inventory Obsolescence |   |                                 |   |                    |   |                     |   |                           |   |
| December 31,  2000                  |   | 488,000                              |   | 440,000                 |   | 357,000                  |   | 571,000                        |   |
| December 31,  2001                  |   | 571,000                              |   | 313,000                 |   | 215,000                  |   | 669,000                        |   |
| December 31,  2002                  |   | 669,000                              |   | 290,000                 |   | —                   |   | 959,000                        |   |

 

 

S-1

----