UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20569 FORM 10-Q [X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1999 Commission file number 0-23150 -------------- ------- IBIS TECHNOLOGY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2987600 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 32 CHERRY HILL DRIVE, DANVERS, MA 01923 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (978) 777-4247 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- 6,933,409 shares of Common Stock, par value $.008, were outstanding on April 30, 1999. Total Number of Pages 19 Exhibit Index at Page 18 1 IBIS TECHNOLOGY CORPORATION INDEX PART 1 - FINANCIAL INFORMATION PAGE - ------------------------------- NUMBER ------ Item 1 - Financial Statements: Balance Sheets December 31, 1998 and March 31, 1999 ............................................ 3 Statements of Operations Three Months Ended March 31, 1998 and 1999 ...................................... 4 Statements of Cash Flows Three Months Ended March 31, 1998 and 1999 ....................................... 5 Notes to Financial Statements ....................................................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 9 Item 3 - Quantitative and Qualitative Disclosure About Market Risk .................... 15 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings .............................................................. 16 Item 2 - Changes in Securities .......................................................... 16 Item 3 - Defaults upon Senior Securities ................................................ 16 Item 4 - Submission of Matters to a Vote of Security Holders ............................ 16 Item 5 - Other Information .............................................................. 16 Item 6 - Exhibits and Reports on Form 8-K ............................................... 16 Signatures .............................................................................. 17 Exhibit Index ........................................................................... 18 2 IBIS TECHNOLOGY CORPORATION BALANCE SHEETS (UNAUDITED) DECEMBER 31, MARCH 31, 1998 1999 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 12,819,366 $ 13,170,774 Accounts receivable, trade, net........................... 546,935 3,632,374 Unbilled revenue.......................................... 2,448,327 2,319,487 Inventories (note 3)...................................... 3,121,084 2,157,150 Prepaid expenses and other current assets................. 151,106 174,821 ------------ ------------ Total current assets................................ 19,086,818 21,454,606 ------------ ------------ Property and equipment....................................... 14,948,862 13,682,649 Less: Accumulated depreciation and amortization.......... (9,872,843) (8,658,736) ------------ ------------ Net property and equipment......................... 5,076,019 5,023,913 Patents and other assets, net................................ 144,481 139,768 ------------ ------------ Total assets $ 24,307,318 $ 26,618,287 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Capital lease obligation, current......................... $ 507,258 $ 377,894 Accounts payable.......................................... 411,065 1,583,177 Accrued liabilities....................................... 1,336,720 2,109,099 ------------ ------------ Total current liabilities........................... 2,255,043 4,070,170 ------------ ------------ Capital lease obligation, noncurrent......................... 39,630 37,336 Other accrued liabilities.................................... 1,403,702 1,359,862 ------------ ------------ Total liabilities................................... 3,698,375 5,467,368 ------------ ------------ STOCKHOLDERS' EQUITY: Undesignated preferred stock, $.01 par value Authorized 2,000,000 shares; none issued................. -- -- Common stock, $.008 par value Authorized 20,000,000 shares; issued 6,858,556 shares and 6,924,443 in 1998 and 1999, respectively............. 54,868 55,396 Additional paid-in capital................................ 36,610,064 36,905,431 Accumulated deficit....................................... (16,055,989) (15,809,908) ------------ ------------ Total stockholders' equity.......................... 20,608,943 21,150,919 ------------ ------------ Total liabilities and stockholders' equity.......... $ 24,307,318 $ 26,618,287 ------------ ------------ ------------ ------------ See accompanying notes to financial statements. 3 IBIS TECHNOLOGY CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1999 ------------ ----------- SALES AND REVENUE: Product sales ................................................................... $ 1,006,698 $ 1,299,485 Contract and other revenue ...................................................... 490,203 358,378 Equipment revenue ............................................................... 200,000 2,790,000 ------------ ----------- Total sales and revenue (notes 2 and 6) ..................................... 1,696,901 4,447,863 COST OF SALES AND REVENUE: Cost of product sales ........................................................... 1,312,538 1,246,084 Cost of contract and other revenue .............................................. 365,913 121,708 Cost of equipment revenue ....................................................... 125,198 1,953,922 ------------ ----------- Total cost of sales and revenue ............................................. 1,803,649 3,321,714 ------------ ----------- Gross profit (loss) ......................................................... (106,748) 1,126,149 ------------ ----------- OPERATING EXPENSES: General and administrative ...................................................... 444,500 434,448 Marketing and selling ........................................................... 114,585 207,170 Research and development ........................................................ 381,955 386,370 ------------ ----------- Total operating expenses .................................................... 941,040 1,027,988 ------------ ----------- Income (loss) from operations ............................................... (1,047,788) 98,161 ------------ ----------- OTHER INCOME (EXPENSE): Interest income ................................................................. 174,690 156,495 Interest expense ................................................................ (34,720) (18,152) Other ........................................................................... -- 10,833 ------------ ----------- Total other income .......................................................... 139,970 149,176 ------------ ----------- Income (loss) before income taxes ........................................... (907,818) 247,337 Income tax expense ................................................................ 1,256 1,256 ------------ ----------- Net income (loss) ........................................................... $ (909,074) $ 246,081 ------------ ----------- ------------ ----------- Net income (loss) per common share: Basic ............................................................................ $ (0.14) $ 0.04 ------------ ----------- ------------ ----------- Diluted .......................................................................... $ (0.14) $ 0.03 ------------ ----------- ------------ ----------- Weighted average number of common shares outstanding: Basic ............................................................................ 6,670,718 6,878,188 ------------ ----------- ------------ ----------- Diluted .......................................................................... 6,670,718 7,198,864 ------------ ----------- ------------ ----------- See accompanying notes to financial statements. 4 IBIS TECHNOLOGY CORPORATION STATEMENT OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1999 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................................. $ (909,074) $ 246,081 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................................................... 476,811 334,018 Changes in operating assets and liabilities: Accounts receivable, trade .................................................. (122,434) (3,085,439) Unbilled revenue ............................................................ 24,675 128,840 Inventories ................................................................. (58,819) 963,934 Prepaid expenses and other assets ........................................... 49,083 (23,715) Accounts payable ............................................................ 544,402 1,172,112 Accrued liabilities ......................................................... (219,814) 728,539 ------------ ------------ Net cash provided by (used in) operating activities ......................... (215,170) 464,370 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ............................................... (1,040,184) (269,774) (Increase) decrease in other assets ............................................... 64,794 (7,425) ------------ ------------ Net cash used in investing activities ....................................... (975,390) (277,199) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital lease obligations ............................................. (112,363) (131,658) Exercise of stock options ......................................................... 549,729 295,895 ------------ ------------ Net cash provided by financing activities ................................... 437,366 164,237 ------------ ------------ Net increase (decrease) in cash and cash equivalents ........................ (753,194) 351,408 Cash and cash equivalents, beginning of period ....................................... 13,309,823 12,819,366 ------------ ------------ Cash and cash equivalents, end of period ............................................. $ 12,556,629 $ 13,170,774 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest .......................................... $ 34,720 $ 18,152 ------------ ------------ ------------ ------------ See accompanying notes to financial statements. 5 IBIS TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) INTERIM FINANCIAL STATEMENTS The accompanying financial statements are unaudited, except for the Balance Sheet as of December 31, 1998, and have been prepared by the Company in accordance with generally accepted accounting principles. In the opinion of management, the interim financial statements include all adjustments which consist only of normal and recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements of the Company as of and for the year ended December 31, 1998 which are included in the Annual Report on Form 10-K. (2) REVENUE RECOGNITION Product sales are recognized upon shipment. Revenue derived from consulting services is recognized upon performance. Contract and equipment revenue is recognized on the percentage-of-completion method. Provisions for anticipated losses are made in the period in which such losses become determinable. Unbilled revenue represents equipment and contract revenue earned but not yet billable based on the terms of the contract which include shipment of the product, achievement of milestones or completion of the contract. (3) CHANGE IN ESTIMATE During 1998 the Company changed depreciable lives for some of its equipment from five years to eight years. As a result, depreciation for the first quarter ended March 31, 1999 was reduced by approximately $196,000. (4) INVENTORIES Inventories consist of the following: DECEMBER 31, MARCH 31, 1998 1999 ---------- ---------- Raw materials.................... $ 197,734 $ 107,464 Work process in.................. 76,343 60,252 Finished goods................... 191,762 102,236 ---------- ---------- Subtotal wafer inventory........ 465,839 269,952 Equipment inventory.............. 2,655,245 1,887,198 ---------- ---------- Total inventories............... $3,121,084 $2,157,150 ---------- ---------- ---------- ---------- 6 IBIS TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (5) EARNINGS PER SHARE RECONCILIATION The reconciliation of the numerators and denominators of the basic and diluted net income (loss) per common share computations for the Company's reported net income (loss) is as follows: THREE MONTHS ENDED MARCH 31, ----------------------------- 1998 1999 ------------- ------------ Basic net income (loss) ...................................................... $ (909,074) $ 246,081 ----------- ---------- ----------- ---------- Weighted average common shares outstanding-basic .................................................. 6,670,718 6,878,188 ----------- ---------- ----------- ---------- Net additional common shares upon assumed exercise of stock options and warrants .................................... -- 320,676 ----------- ---------- Weighted average common shares outstanding-diluted ................................................ 6,670,718 7,198,864 ----------- ---------- ----------- ---------- Net income (loss) per common share Basic ............................................................... $ (0.14) $ 0.04 ----------- ---------- ----------- ---------- Diluted ............................................................. $ (0.14) $ 0.03 ----------- ---------- ----------- ---------- (6) INDUSTRY SEGMENTS The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information during the fourth quarter of 1998. SFAS No. 131 established the standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. The Company's reportable segments are SIMOX Wafer Products, SIMOX Equipment and Other Products or Services. For purposes of segment reporting, government contracts, service contracts, license revenue and spares are combined and reported as Other Products or Services. 7 IBIS TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) The table below provides information for the three months ended March 31, 1998 and 1999 pertaining to the Company's three industry segments. SIMOX WAFER SIMOX OTHER PRODUCTS PRODUCTS EQUIPMENT OR SERVICES TOTAL -------- --------- ----------- ----- NET REVENUES - ------------ Three Months Ended March 31, 1998 $ 1,006,698 $ 200,000 $ 490,203 $ 1,696,901 Three Months Ended March 31, 1999 1,299,485 2,790,000 358,378 4,447,863 OPERATING INCOME (LOSS) - ----------------------- Three Months Ended March 31, 1998 (516,793) (210,785) 124,290 (603,288) Three Months Ended March 31, 1999 (14,920) 310,859 236,670 532,609 ASSETS - ------ December 31, 1998 5,411,282 5,262,751 353,068 11,027,101 March 31, 1999 5,447,797 7,402,986 185,825 13,036,608 The table below provides the reconciliation of reportable segment operating income (loss) and assets to the Company's totals. THREE MONTHS ENDED ------------------------------ SEGMENT RECONCILIATION 3/31/98 3/31/99 - ---------------------- ------- ------- Income (Loss) Before Income Taxes: Total operating income (loss) for reportable segments $ (603,288) $ 532,609 Corporate general & administrative expenses (444,500) (434,448) Net other income 139,970 149,176 ------------ ------------ Income (loss) before income taxes (907,818) 247,337 ------------ ------------ ------------ ------------ 12/31/98 3/31/99 -------- ------- Assets: Total assets for reportable segments .................................. 11,027,101 13,036,608 Cash & cash equivalents not allocated to segments ..................... 12,819,366 13,170,774 Other unallocated assets .............................................. 460,851 410,905 ------------ ------------ Total Assets .......................................................... 24,307,318 26,618,287 ------------ ------------ ------------ ------------ 8 IBIS TECHNOLOGY CORPORATION PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Ibis Technology Corporation ("Ibis" or the "Company") was formed in October 1987 and commenced operations in January 1988. The Company's initial activities consisted of producing and selling SIMOX-SOI wafers and conducting funded and unfunded research and development activities. This research led to the Company's development of a proprietary second generation implanter, the Ibis 1000, which it began selling in 1996, and to other proprietary process technology. Initially, much of the Company's revenue was derived from research and development contracts and sales of SIMOX-SOI wafers for military applications. Over the years, there has been a shift in revenue to sales of SIMOX-SOI wafers for commercial applications and sales of Ibis 1000 implanters. To date, most customers of the Company that have purchased wafers for what the Company believes are commercial applications have done so solely for the purpose of characterizing and evaluating the wafers. In addition, we believe the sales of Ibis 1000 implanters have been for the evaluation or pilot production of SIMOX-SOI wafers. Thus, historical sales are not necessarily indicative of future operations because such sales would not be considered of a recurring nature. However, three of the Company's customers have indicated their intentions to adopt SIMOX-SOI technology in commercial products. One of these customers has indicated that it would be delivering volume quantities of high performance microprocessors built on SIMOX-SOI to internal customers by the end of 1999. The Company has experienced quarterly fluctuations in revenue due to equipment sales, reduced wafer requirements from certain customers, repair and maintenance on the Ibis 1000 implanters, use of the implanters for SIMOX-SOI development, a mismatch of capacity and wafer size requirements of customer orders, and dependence on a limited number of customers. The Company may continue to experience fluctuations in revenue due to equipment sales, shifts in customer demands during various stages of the SIMOX-SOI sales cycle and until the Company has a sufficient number of Ibis 1000's on-line such that specific implanters can be dedicated to the various products, sizes and continued research and development efforts. The Company currently utilizes two Ibis 1000 oxygen implanters, for the production of wafers, one of which was funded by Motorola Corporation and must first be used to serve Motorola's production requirements. The Company recognized revenue on the sale of Ibis 1000 implanters using the percentage-of-completion method. RESULTS OF OPERATIONS FIRST QUARTER ENDED MARCH 31, 1999 COMPARED TO FIRST QUARTER ENDED MARCH 31, 1998 PRODUCT SALES. Wafer product sales increased $292,787, or 29%, to $1,299,485 for the first quarter ended March 31, 1999 from $1,006,698 for the first quarter ended March 31, 1998. The increase in product sales is attributable to increased wafer sales to customers in the United States partially offset by decreased wafer sales to customers in Europe and Japan. 9 IBIS TECHNOLOGY CORPORATION PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONTRACT AND OTHER REVENUE. Contract and other revenue decreased for the first quarter ended March 31, 1999 to $358,378 from $490,203 for the first quarter ended March 31, 1998, a decrease of $131,825 or 27%. This decrease is attributable to a decrease in revenues derived from a contract for consulting services for Orion Equipment, Inc. ("Orion"). Revenue from the Orion contract amounted to approximately $136,000 in the first quarter of 1998 and zero in 1999. Revenues under the Orion contract have decreased substantially since the beginning of 1998 and primarily all of the work under the Orion contract was completed by the end of the second quarter of 1998. During 1997, the Company began selling spare parts to the purchaser of the Ibis 1000 implanter, a major semiconductor manufacturer. These sales accounted for 9% of contract and other revenue for the first quarter ended March 31, 1999 as compared to 16% for the first quarter ended March 31, 1998. These decreases were partially offset by revenue generated by the newly established customer support organization and by license fee revenue. EQUIPMENT REVENUE. Equipment revenue represents revenue recognized using the percentage-of-completion method in connection with the sale of Ibis 1000 implanters. Equipment revenue increased to $2,790,000 for the first quarter ended March 31, 1999 from $200,000 for the first quarter ended March 31, 1998. TOTAL SALES AND REVENUE. Total sales and revenue for the first quarter ended March 31, 1999 was $4,447,863, an increase of $2,750,962, or 162%, from total revenue of $1,696,901 for the first quarter ended March 31, 1998. This increase resulted from the increase in equipment revenue recognized and the increase in product sales partially offset by decreased contract and other revenue. TOTAL COST OF SALES AND REVENUE. Cost of product sales for the first quarter ended March 31, 1999 was $1,246,084, as compared to $1,312,538 for the first quarter ended March 31, 1998, a decrease of $66,454 or 5%. Cost of contract revenue for the first quarter ended March 31, 1999 was $121,708, as compared to $365,913 for the first quarter ended March 31, 1998, a decrease of $244,205, or 67%. Cost of equipment revenue for the first quarter ended March 31, 1999 was $1,953,922 as compared to $125,198 for the first quarter ended March 31, 1998, an increase of $1,828,724. The gross margin for all sales was 25% for the first quarter ended March 31, 1999 as compared to a negative 6% for the first quarter ended March 31, 1998. The increase in gross margin is attributable to the profit recognized from equipment revenue and product sales for the quarter. The fundamental fixed cost nature of product sales, which was absorbed by a larger number of wafers sold during the first quarter of 1999 as compared to the same quarter in the previous year, resulted in a positive impact on margins. Cost of contract and other revenue consists of labor and materials expended during the quarter. Contract margins can vary from year to year based on the type of contracts that the Company enters into. Additionally, different fee arrangements and indirect cost absorption can contribute to margin variability. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the first quarter ended March 31, 1999 were $434,448 (or 10% of total revenue) as compared to $444,500 (or 26% of total revenue) for the first quarter ended March 31, 1998, a decrease of $10,052, or 2%. The decrease is due to decreases in professional service fees partially offset by an increase in payroll and payroll related expenses incurred in the quarter. 10 IBIS TECHNOLOGY CORPORATION PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MARKETING AND SELLING EXPENSES. Marketing and selling expenses for the first quarter ended March 31, 1999 were $207,170 (or 5% of total revenue) as compared to $114,585 (or 7% of total revenue) for the first quarter ended March 31, 1998, an increase of $92,585, or 81%. The increase is due to increases in payroll and payroll related expenses incurred in the establishment of a new customer support organization. RESEARCH AND DEVELOPMENT EXPENSES. Internally funded research and development expenses increased by $4,415 or 1%, to $386,370 (or 9% of total revenue) for the first quarter ended March 31, 1999, as compared to $381,955 (or 23% of total revenue) for the first quarter ended March 31, 1998. The increase is primarily due to an increase in payroll expenses. INCOME FROM OPERATIONS. The income from operations for the first quarter ended March 31, 1999 was $98,161 as compared to a loss of $1,047,788 for the first quarter ended March 31, 1998, an increase of $1,145,949, or 109%. The increase in the income from operations is the result of increases in equipment revenue and product sales, which were partially offset by decreases in contract and other revenue, as well as the increase in operating expenses. OTHER INCOME (EXPENSE). Total other income for the first quarter ended March 31, 1999 was $149,176 as compared to $139,970 for the first quarter ended March 31, 1998, an increase of $9,206, or 7%. The increase in total other income is attributable to reduced interest expense on capitalized leases, offset by reduced interest income earned on cash balance. INCOME (LOSS) BEFORE INCOME TAXES. The income before income taxes was $247,337 for the first quarter ended March 31, 1999, as compared to a loss of $907,818 for the first quarter ended March 31, 1998. The improvement of $1,155,155, or 127%, is due to equipment revenue recognized in the quarter ended March 31, 1999 and increased product sales, which were partially offset by decreases in contract and other revenue and increases in operating expenses. IMPACT OF THE YEAR 2000 ISSUE THE YEAR 2000 ISSUE The Year 2000 Issue refers to potential problems with computer systems or any equipment with computer chips or software that use dates where the date has been stored as just two digits (e.g., 98 for 1998). On January 1, 2000, any clock or date recording mechanism incorporating date sensitive software which uses only two digits to represent the year may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities. 11 IBIS TECHNOLOGY CORPORATION PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THE COMPANY'S STATE OF READINESS To determine the effect, if any, of the Year 2000 Issue on its operations, the Company began a review of its internal information systems in the second quarter of 1998. The Company has implemented a common software system in both the operations and financial management areas for the purpose of integrating the various systems. The Company believes that such common system is Year 2000 compliant and is fully operational. The Company will continue to test less critical information systems and expects to complete this review and any required upgrades by the second quarter of 1999. During the first quarter of 1998, the Company conducted a test plan on its Ibis 1000 implanter equipment and determined based on these tests that the current version is Year 2000 compliant. It was also determined that the operating system of one older version Ibis 1000 has to be upgraded in order to be Year 2000 compliant; the largest issue being with the file manager displaying and sorting the date properly after 2000. An updated version of the file manager which corrects this problem is available. This upgrade will be completed by the second quarter of 1999. The Company believes that an error in date calculation will not impact the ability of the system to produce wafers. The Company also believes that the worst case scenario is that the date will have to be set manually on the dates found to be suspect and that there are no issues with the operating system which could cause system failure or interfere with the operation of the Ibis 1000 implanter. The Company has reviewed its ancillary production equipment and has determined the extent of software upgrades necessary in order for the systems to be Year 2000 compliant. If the software upgrades were deficient or the Company elected not to do the upgrades, the Company's ability to use this equipment would not be impacted, as the systems are stand-alone and the functions are not date sensitive. The worst case scenario is that the Company could turn back the computer clocks. The Company expects to complete these software upgrades by the beginning of the third quarter of 1999. The Company is also in the process of contacting its major suppliers and customers in an effort to determine the extent to which the failure of these parties to timely identify and correct their own problems associated with the Year 2000 Issue may affect the Company. A re-evaluation of critical suppliers was completed, and additional letters were sent to these suppliers requesting Year 2000 status and proof of compliance. Although this review is ongoing, to date, the Company has not identified any situations of non-compliance that would materially adversely affect the Company's operations or financial condition. The Company expects this review to be complete by the end of the second quarter of 1999. Although the Company has not completed its review and is still gathering information, based on its review to date, the Company believes that its principal information systems either currently correctly define the year 2000 or will be upgraded to be Year 2000 compliant and thus, the impact of the Year 2000 Issue will have no material effect on its systems. 12 IBIS TECHNOLOGY CORPORATION PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COSTS ASSOCIATED WITH THE YEAR 2000 ISSUE To date the costs incurred by the Company to conduct the review of its internal information systems and to identify the impact of the Year 2000 issue on its major suppliers and customers have been immaterial and the Company expects that the additional costs incurred to complete this review will also be immaterial. The costs to implement the common software system are not considered Year 2000 costs as they were included in the Company's integration plan and were not accelerated due to Year 2000 issues. The costs to perform upgrades to correct the Year 2000 Issues that the Company has identified to date are estimated at approximately $30,000. However, the costs incurred by the Company to address the Year 2000 Issue could increase materially if in completing the review of its internal information systems, the Company identifies non-compliant systems which must be replaced or modified or if the Company identifies any other problem related to the Year 2000 Issue which must be addressed. RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE To the extent that the Company's assessment is completed and non-compliant systems operated by the Company or by third parties are not identified, the Year 2000 issue could have a material adverse effect on the operations of the Company. The Company could experience delays in the manufacturing of wafers or the building of equipment. The severity of these possible problems would depend on the nature of the problem and how quickly it could be corrected or an alternate implemented, which is unknown at this time. CONTINGENCY PLANS The Company has formal contingency plans in place for the systems it has identified as being non-compliant. Contingency plans will also be developed if certain suppliers do not supply the Company with adequate information on their compliance or if they are not going to be ready in time to meet the Year 2000 deadline. The Company expects to have all of the documentation in place by the second quarter of 1999 and at that time if suppliers are identified that are unable to become Year 2000 compliant within an appropriate time frame, the Company would identify alternative sources of suppliers. Based on currently available information, the Company does not believe that the Year 2000 Issue will have a material effect on the Company's internal information systems. There can be no assurance, however, that the Company will not in the future identify non-compliant systems or other problems related to the Year 2000 issue which may have a material adverse effect on the Company's future operating results or financial condition. In addition, there can be no assurance that the failure to ensure Year 2000 capability by a supplier or another third party would not have a material adverse effect on the Company. 13 IBIS TECHNOLOGY CORPORATION PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1999, the Company had cash and cash equivalents of $13,170,774. During the first quarter ended March 31, 1999, the Company generated $464,370 in cash from operating activities as compared to cash consumed from operations in the amount of $215,170 for the same period in 1998. Depreciation and amortization expense for the first quarter ended March 31, 1999 and 1998 was $334,018 and $476,811, respectively. This accounted for 8% and 28% of total revenue, respectively. Due to the capital intensive nature of the Company's business and the anticipated expansion of its facilities and production capacity, management expects that depreciation and amortization will continue to be a significant portion of its expenses. To date, the Company's working capital requirements have been funded through debt and equity financings, warrant conversions, exercise of options and warrants, equipment lines of credit, a working capital line of credit, a term loan, sale leaseback arrangements, collaborative relationships, government contracts and product and equipment sales. The principal use of cash during the first quarter ended March 31, 1999 was to fund additions to property and equipment which totaled approximately $270,000. As of March 31, 1999, the Company had invested $15,220,097 in property and equipment. At March 31, 1999, the Company had commitments to purchase approximately $3,372,000 in material or subassemblies to be used for manufacturing Ibis 1000 implanters currently under construction and approximately $334,000 in capital equipment purchases. The Company anticipates that it may be required to raise substantial additional capital in the future in order to finance expansion of its manufacturing capacity and its research and development programs. The Company's existing cash resources together with funds generated from operations are believed to be sufficient to support the Company's operations on their anticipated scale for at least the next twelve months. Management of the Company currently believes that this anticipated scale of operations will include the addition of Ibis 1000 oxygen implanters (in addition to its two oxygen implanters currently on-line), the purchase of support equipment and the expansion of the Company's facilities. Additional implanters are expected to be transferred to production at various times as additional capacity is needed to meet demand. EFFECTS OF INFLATION The Company believes that over the past three years inflation has not had a significant impact on the Company's sales or operating results. 14 IBIS TECHNOLOGY CORPORATION PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) BUSINESS OUTLOOK This Form 10-Q contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Such factors and uncertainties include, but are not limited to, the timely implementation by the Company of its plan to prepare its computer systems for the Year 2000, the costs to the Company of such implementation and the timely conversion by other parties upon which the Company's business relies; the uncertainty that the performance advantages of SIMOX-SOI wafers will continue to be realized commercially or that a commercial market for SIMOX-SOI wafers will continue to develop; the dependence by the Company on key customers (during 1996, 1997 and 1998, revenues from four customers averaged in the aggregate between 56% and 85% of the Company's revenues, so that the loss of one or more of these major customers and the failure of the Company to obtain other sources of revenue could have a material adverse impact on the Company); the loss of the services of one or more of the Company's key individuals, which could have a material adverse impact on the Company; the dependence by the Company on key suppliers, so that the loss of services of one or more suppliers could have a material adverse impact on the Company; the development of competing or superior technologies and products from manufacturers, many of which have substantially greater financial, technical and other resources than the Company; the Company's lack of experience in producing commercial quantities of its products at acceptable costs; the Company's ability to successfully complete the manufacture of its implanters and that these implanters will be accepted by its customers; the Company's ability to develop and maintain strategic alliances for the manufacturing, marketing and distribution of its products and sale of equipment; the cyclical nature of the semiconductor industry, which has negatively affected the Company's sales of SIMOX-SOI wafers during industry downturns and which could continue to do so in the future; the limited availability of critical materials and components for wafer products and implanters, as a shortage of such materials and components or a significant increase in the price thereof could have a material adverse effect on the Company's business and results of operations; the availability of additional capital to fund expansion on acceptable terms, if at all; and general economic conditions. PART I - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The exposure of market risk associated with risk-sensitive instruments is not material to the Company, as the Company does not transact its sales denominated in other than United States dollars, invests primarily in short-term commercial paper, holds its investments until maturity and has not entered into hedging transactions. 15 IBIS TECHNOLOGY CORPORATION PART II OTHER INFORMATION Item 1 - LEGAL PROCEEDINGS None Item 2 - CHANGES IN SECURITIES None Item 3 - DEFAULTS UPON SENIOR SECURITIES None Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5 - OTHER INFORMATION None Item 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits furnished as Exhibits hereto: 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed with the Securities and Exchange Commission on January 29, 1999 a Current Report on Form 8-K for the January 27, 1999 event reporting an equipment sale to a leading semiconductor manufacturer in a transaction valued at approximately $8 million. The Company filed with the Securities and Exchange Commission on February 26, 1999 a Current Report on Form 8-K for the February 24, 1999 event announcing 1998 fourth quarter and year end results; and that its 1999 Annual Meeting of Stockholders had been scheduled for May 13, 1999 at 10:00 a.m. (Eastern Time) at the Company's offices. 16 IBIS TECHNOLOGY CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Ibis Technology Corporation Date: May 10, 1999 By: /s/ Debra L. Nelson ------------------------------------------------ Debra L. Nelson Chief Financial Officer, Treasurer and Clerk (principal financial and accounting officer) Date: May 10, 1999 By: /s/ Thomas F. Lacey ------------------------------------------------ Thomas F. Lacey Controller and Assistant Treasurer 17 IBIS TECHNOLOGY CORPORATION EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 27 Financial Data Schedule 20 18