iRobot 2005 Annual Report Download

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Annual Report 2005
Innovation Opportunity Leadership

Table of contents

  • Page 1
    Innovation Opportunity Leadership Annual Report 2005

  • Page 2
    ...this emerging market. For this reason, our target financial model is five years into the future, and focuses on increasing pre-tax earnings to the mid-to-high teens (as a percentage of sales) by the end of that period. We are committed to investing in our future and broadening iRobot's product and...

  • Page 3

  • Page 4

  • Page 5
    ... No ¥ Our common stock began trading on the Nasdaq National Market on November 9, 2005. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on November 9, 2005 was approximately $223,799,184 based on the initial public offering price of the...

  • Page 6
    ... and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accounting Fees and Services Part IV Exhibits, Financial Statement Schedules...

  • Page 7
    ... robots. Our AWARE systems allow our Roomba floor vacuuming robot to clean an entire floor while avoiding obstacles and not falling down stairs, and also allow our PackBot robots and the R-Gator unmanned ground vehicle to accomplish complex missions such as waypoint navigation and real-time obstacle...

  • Page 8
    ... line to our customers. Within the consumer market today we offer floor cleaning products for various surfaces at multiple price points, as well as a number of product accessories. We are extending our military robot offerings from small, unmanned ground vehicles (such as our PackBot line of robots...

  • Page 9
    ... AWARE systems allow our Roomba floor vacuuming robot and our Scooba floor washing robot to clean an entire floor while avoiding obstacles and not falling down stairs, and also allow our PackBot robots and the R-Gator unmanned ground vehicle to accomplish complex missions such as waypoint navigation...

  • Page 10
    ... direct Roomba to clean specific areas, batteries and chargers, filters and brushes, and wall mounts. We plan to continue to develop upgrades to our Roomba product line. iRobot Scooba. Scooba, our second major consumer product line, is the first floor washing robot available for home use. Our Scooba...

  • Page 11
    ... incendiary devices. R-Gator: Autonomous Unmanned Ground Vehicle. The R-Gator prototype is built on the wellestablished rugged Deere & Company M-Gator military utility vehicle platform and enhanced with iRobot robotic controls, navigation and obstacle avoidance systems. The R-Gator is designed to...

  • Page 12
    ... projects that we are currently undertaking include: Small Unmanned Ground Vehicle (SUGV). FCS is a major program intended to transform the U.S. Army to be strategically responsive and dominant at every point on the spectrum of operations, through real-time network centric communications and systems...

  • Page 13
    ...By offering extensible platforms designed to carry payloads, we have designed and manufactured our products to leverage the work of those individuals and organizations that offer specialized technological expertise. The PackBot, the Roomba and the Scooba robots are designed with open interfaces that...

  • Page 14
    ... a material component of our product sales, we maintain, and intend to expand our direct-to-consumer offerings through the iRobot on-line store. We have established valuable databases and customer lists that allow us to target directly those consumers most likely to purchase a new robot or upgrade...

  • Page 15
    ...also playing an increasing role in supporting brand awareness, addressing customer questions and serving as a showcase for our products. Our consumer robots and accessories are sold through our online store. Manufacturing Our core competencies are the design, development and marketing of robots. Our...

  • Page 16
    ... office in San Luis Obispo, California. In addition, we have an engineering design center in India and a product development team working out of Hong Kong. Our global engineering development process for consumer products allows us to leverage the time differences between our United States operations...

  • Page 17
    ..., or SPAWAR, Technical Support Working Group, or TSWG, and the U.S. Army's FCS program. While the U.S. government retains certain rights in the research projects that it has funded, we retain ownership of patents and know-how and are generally free to develop other commercial products, including...

  • Page 18
    ... competitive factors in the market for robots include product features and performance for the intended mission, cost of purchase and total cost of system operation, including maintenance and support, ease of use and integration with existing equipment, quality, reliability and customer support...

  • Page 19
    ... products and technical data. We also need special security clearances to continue working on and advancing certain of our projects with the U.S. federal government. Classified programs generally will require that we comply with various Executive Orders, federal laws and regulations and customer...

  • Page 20
    ... a number of subsidiaries in the United States and abroad, including operations in Hong Kong and India. We also maintain iRobot Securities Corporation, a Massachusetts securities corporation, to invest our cash balances on a short-term basis. Our website address is www.irobot.com. Our Annual Report...

  • Page 21
    ... at rates that will allow us to maintain profitability on a quarterly or annual basis. In addition, we only have a limited operating history on which you can base your evaluation of our business. If we fail to maintain profitability, the market price of our common stock will likely fall. We operate...

  • Page 22
    ... consumer home floor care market, to enhance our current consumer products and develop and introduce new consumer products offering enhanced performance and functionality at competitive prices. The development and application of new technologies involve time, substantial costs and risks. For example...

  • Page 23
    ...increase in new sales to other customers would have a material adverse effect on our operating results. Our participation in specific major U.S. federal government programs is critical to both the development and sale of our military robots. For example, in the years ended December 31, 2005 and 2004...

  • Page 24
    ... to manufacture our military products at a single plant in the United States. Moreover, we do not have a long-term contract with Jetta Company Limited and the manufacture of our consumer products is provided on a purchase-order basis. These manufacturers supply substantially all of the raw materials...

  • Page 25
    ...2005 that the Chinese yuan has moved to a managed floating exchange rate regime, which could lead to our suppliers in China negotiating increased pricing terms with us. Any efforts to expand our product offerings beyond our current markets may not succeed, which could negatively impact our operating...

  • Page 26
    ... impact our results of operations and cause our market share to decline. We believe that a number of companies have developed or are developing robots that will compete directly with our product offerings. Additionally, large and small companies, government-sponsored laboratories and universities...

  • Page 27
    ... customers purchase our floor vacuuming robots as a supplement to, rather than a replacement for, their traditional vacuum cleaners; we also compete in some cases with providers of traditional vacuum cleaners. Our current principal competitors include: ‚ developers of robotic floor care products...

  • Page 28
    ... needs of the markets in which we offer our robots. Delays in introducing new products and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to forego...

  • Page 29
    ..., our products could lose market share, our revenue and profits could decline, or we could experience operating losses. Moreover, if we are unable to offset our product development costs through sales of existing or new products or product enhancements, our operating results and gross margins would...

  • Page 30
    ... the development of the R-Gator unmanned ground vehicle, and The Clorox Company on the cleaning solution used in our Scooba floor washing robot. Under these collaborations, we may be dependent on our collaborators to fund some portion of development of the product or to manufacture and market either...

  • Page 31
    ... and technical data. Also, we need special clearances to continue working on and advancing certain of our projects with the U.S. federal government. For example, if we were to lose our security clearance, we would be unable to continue to participate in the U.S. Army's Future Combat Systems program...

  • Page 32
    ... and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. In addition, the laws of countries other than the United States in which we market our products may afford little or no...

  • Page 33
    ...our working capital line of credit, will be sufficient to meet our current and anticipated needs for general corporate purposes. We operate in an emerging market, however, which makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or...

  • Page 34
    ... 31, 2005 and 2004, sales to non-U.S. customers accounted for 9.9% and 7.4% of total revenue, respectively. Our international revenue and operations are subject to a number of material risks, including, but not limited to: ‚ difficulties in staffing, managing and supporting operations in multiple...

  • Page 35
    ...we would be delayed or prevented from selling our products in international jurisdictions, which could materially harm our business, operating results and ability to generate revenue. Risks Related to Ownership of Our Common Stock An active trading market for our common stock may not be available on...

  • Page 36
    ... to sell shares, could reduce the market price of our common stock. Our directors and management will exercise significant control over our company, which will limit your ability to influence corporate matters. Immediately following our initial public offering, our directors and executive officers...

  • Page 37
    ...AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock commenced trading on the Nasdaq National Market on November 9, 2005 under the symbol ""IRBT''. The following table sets forth the high and low sale prices for our common stock for fiscal 2005 since our initial public offering as reported on...

  • Page 38
    ... last reported sale price of our common stock on the Nasdaq National Market on February 28, 2006 was $27.50 per share. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, to finance the growth and development...

  • Page 39
    ...Total revenue Cost of Revenue Cost of product revenue Cost of contract revenue Total cost of revenue Gross Profit (Loss)(1 Operating Expenses Research and development Selling and marketing(2 General and administrative Stock-based compensation Total operating expenses Operating Income (Loss...

  • Page 40
    ... vacuuming robot and Scooba floor washing robot perform time-consuming domestic chores, and our PackBot tactical military robots perform battlefield reconnaissance and bomb disposal. In addition, we are developing the Small Unmanned Ground Vehicle reconnaissance robot for the U.S. Army's FCS program...

  • Page 41
    ... and development services. Product revenue is derived from the sale of our various home floor care and PackBot robots and related accessories. Research and development revenue is derived from the execution of contracts awarded by the U.S. federal government, other governments and a small number of...

  • Page 42
    ... direct material costs. Additionally, we include overhead expenses such as indirect engineering labor, occupancy costs associated with the project resources, engineering tools and supplies and program management expenses. For the fiscal years ended December 31, 2005 and 2004, cost of contract...

  • Page 43
    .... An example of this is the engineering design center we opened in India late in 2005. Substantially all of our research and development is performed in the United States, although we maintain engineering personnel in India and Hong Kong to serve as a liaison between our U.S.-based engineering staff...

  • Page 44
    ...-employees to purchase our common stock. Stock-based compensation expenses related to nonemployees are measured on a fair-value basis using the Black-Scholes valuation model on the date of grant and amortized over the applicable vesting period. Deferred stock-based compensation based on outstanding...

  • Page 45
    experience of returns would have a material impact on our quarterly and annual results of operations. The estimates for returns are adjusted periodically based upon historical rates of returns. The estimates and reserve for rebates and price protection are based on specific programs, expected usage ...

  • Page 46
    ... to stock compensation. Warranty We provide a one-year warranty against defects in materials and workmanship and will either repair the goods, provide replacement products at no charge to the customer or refund amounts to the customer for defective products. We record estimated warranty costs, based...

  • Page 47
    ... Total revenue Cost of Revenue Cost of product revenue Cost of contract revenue Total cost of revenue Gross profit(1 Operating Expenses Research and development Selling and marketing General and administrative Stock-based compensation(2 Total operating expenses Operating Income (Loss...

  • Page 48
    ... Cost of Revenue Cost of product revenue Cost of contract revenue Total cost of revenue Gross profit Operating Expenses Research and development Selling and marketing General and administrative Stock-based compensation Total operating expenses Operating Income (Loss Other Income (Expense...

  • Page 49
    ... generated under funded research and development contracts, including under the Future Combat Systems program. Our revenue in fiscal 2004 was positively impacted by our conversion in accounting for U.S. consumer product sales from a ""sell-through'' basis (when retail stores sell our Roomba robots...

  • Page 50
    ... in direct marketing and advertising programs and promotional expenses in support of the Roomba product line, including our Roomba Scheduler robot, which was launched in the third quarter of 2005, as well as increased salaries and related personnel costs associated with the expansion of our selling...

  • Page 51
    ...to our Roomba product line resulting in the launch of the second-generation of our Roomba floor vacuuming robots in fiscal 2004. In addition, at the beginning of fiscal 2004, we began product development work on our Scooba floor washing robot. Research and development expenses for our government and...

  • Page 52
    ... of goods shipped to our domestic third-party logistic providers for the fulfillment of domestic retail orders and direct-to-consumer sales. Our inventory of military products is minimal as they are generally built to order. Our contract manufacturers are responsible for purchasing and stocking the...

  • Page 53
    ... losses, largely attributable to our investment in internally funded research and development. Based on our historical product development efforts, we launched our first commercial products, our Roomba floor vacuuming robot and our PackBot tactical military robot, in fiscal 2002. Since fiscal 2002...

  • Page 54
    ...Needs We currently have no material cash commitments, except for normal recurring trade payables, expense accruals and operating leases, all of which we anticipate funding through our existing working capital line of credit, working capital and funds provided by operating activities. In addition, we...

  • Page 55
    obligations for services. The following table describes our commitments to settle contractual obligations in cash as of December 31, 2005: Less Than 1 Year Payments Due by Period 1 to 3 3 to 5 More Than Years Years 5 Years (In thousands) Total Operating leases Minimum contractual payments Total ...

  • Page 56
    ... rates associated with operating expenses of our foreign operations, but we believe this exposure to be immaterial. Interest Rate Sensitivity We had unrestricted cash and cash equivalents at December 31, 2005 totaling $76.1 million. The unrestricted cash and cash equivalents are held for working...

  • Page 57
    ... at December 31, 2005 and 2004 Consolidated Statements of Operations for the Years ended December 31, 2005, 2004 and 2003 ÏÏÏÏ Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Cash Flows for the Years...

  • Page 58
    ... of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility...

  • Page 59
    ...018 Total current liabilities Long-term liabilities Commitments and contingencies (Note 13): Redeemable convertible preferred stock (Note 8 Common stock, $0.01 par value, 100,000 and 35,000 shares authorized and 23,406 and 10,129 issued and outstanding at December 31, 2005 and 2004, respectively...

  • Page 60
    ... Total revenue Cost of revenue: Cost of product revenue Cost of contract revenue Total cost of revenue Gross profit Operating expenses: Research and development Selling and marketing General and administrative Stock-based compensation(1 Total operating expenses Operating income (loss...

  • Page 61
    ...of deferred compensation relating to restricted stock Issuance of common stock for exercise of stock options 442,204 Repayment of note receivable from stockholder Conversion of preferred to common stock 9,557,246 Proceeds of initial public offering, net of costs 3,260,870 Conversion of warrants...

  • Page 62
    ... Accounts payable Accrued expenses Accrued compensation Provision for contract settlement Deferred revenue Change in long-term liabilities Net cash provided by (used in) operating activities Cash flows from investing activities: Purchase of property and equipment Cash flows from financing...

  • Page 63
    ... in 1990 to develop robotics and artificial intelligence technologies and apply these technologies in producing and marketing robots. The majority of the Company's revenue is generated from product sales, and government and industrial research and development contracts. The Company is subject to...

  • Page 64
    .... These cash equivalents are carried at cost, which approximates fair value. Revenue Recognition The Company derives its revenue from product sales, government research and development contracts and commercial research and development contracts. The Company sells products directly to customers and...

  • Page 65
    ...Furniture Machinery Tooling Business applications software Capital leases and leasehold improvements 3 years 5 2-5 2 5 Term of lease Expenditures for additions, renewals and betterments of plant and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as...

  • Page 66
    ...than book value. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. There were no impairment charges recorded during any of the periods presented...

  • Page 67
    ... value of each stock option granted using the Black-Scholes option-pricing model with the following weighted average assumptions, in 2005, 2004 and 2003 was estimated as $4.402, $0.416 and $0.314, respectively, on the date of grant. 2005 2004 2003 Risk-free Expected Expected Expected interest rate...

  • Page 68
    .... Advertising Expense The Company expenses advertising costs as they are incurred. During the years ended December 31, 2005, 2004 and 2003, advertising expense totaled $10.5 million, $7.8 million and $10.1 million, respectively. Income Taxes Deferred taxes are determined based on the difference...

  • Page 69
    ..., including grants of employee stock options, using a fair-value-based method and the recording of such expense in the Company's consolidated statement of operations. The accounting provisions of SFAS No. 123R are effective for fiscal years beginning after June 15, 2005. The pro forma disclosures...

  • Page 70
    ...for the Company for fiscal periods beginning January 1, 2006. The adoption of SFAS 151 will not have an effect on the consolidated results of operations and financial condition. 3. Inventory Inventory consists of the following at: December 31, 2005 2004 (In thousands) Raw materials Work in process...

  • Page 71
    ...LIBOR rates. The line expires on May 26, 2007 at which time all advances will be immediately due and payable. Borrowings are secured by substantially all of the Company's assets other than its intellectual property. The Company is required to maintain quarterly tangible net worth thresholds based on...

  • Page 72
    ... stock. 8. Redeemable Convertible Preferred Stock The Company's redeemable convertible preferred stock, $0.01 par value, is comprised of the following: December 31, 2005 2004 (In thousands) Series F; 1,412 shares authorized, issued and outstanding at December 31, 2004, net of issuance costs...

  • Page 73
    ... the value of preferred stock based on recent financing activities. Subsequent to the Company's initial public offering, the exercise price of stock options granted is equal to the closing price on the NASDAQ National Market on the date of grant. The exercise price of nonstatutory options may be set...

  • Page 74
    ... stock options at exercise prices that equaled the fair value of its common stock as estimated by its board of directors, with input from management, as of the date of grant. Because there was no public market for the Company's common stock prior to its initial public offering on November 9, 2005...

  • Page 75
    ... market value of its common stock increased from $4.60 to $21.60 due to a number of factors such as, among other things, the likelihood of an initial public offering, its improving operating results and the achievement of other corporate milestones in 2005. Based upon this determination, the Company...

  • Page 76
    ...a UK Government agency (the ""Customer'') dated February 9, 2004, attempting to terminate a contract for the design, development, production and support of a number of man-portable remote control vehicles for use in explosive ordnance disposal operations. The Company entered into the contract on May...

  • Page 77
    ... these agreements as of December 31, 2005 and 2004, respectively. Warranty The Company provides warranties on most products and has established a reserve for warranty based on identified warranty costs. The reserve is included as part of accrued expenses (Note 5) in the accompanying balance sheets...

  • Page 78
    ... includes mobile robots used in the maintenance of domestic households sold primarily to retail outlets. Government and Industrial The Company's government and industrial division offers products through a small U.S. governmentfocused sales force, while products are sold to a limited number of...

  • Page 79
    ...: Consumer Government & Industrial Other Total cost of revenue Gross profit (loss): Consumer Government & Industrial Other Total gross profit Research and development Other Selling and marketing Other General and administrative Other Stock-based compensation Other Other (expense) income...

  • Page 80
    iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Significant Customers For the fiscal years ended December 31, 2005 and 2004, U.S. federal government orders, contracts and subcontracts accounted for 28.3% and 20.1% of total revenue, respectively. 16. Quarterly Information...

  • Page 81
    ... to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION Our policy governing transactions in our securities by directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5...

  • Page 82
    ... fees and services is incorporated by reference to the information set forth in the sections titled ""Ratification of Appointment of Independent Auditors'' in our Proxy Statement. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following are filed as part of this Annual Report on...

  • Page 83
    ... schedule, or because the information required is included in the consolidated financial statements or the Notes thereto. 3. (b) Exhibits Ì See item 15(b) of this report below Exhibits The following exhibits are filed as part of and incorporated by reference into this Annual Report: Exhibit Number...

  • Page 84
    ... Description 10.17(1) Government Contract N00174-03-D-0003 (Man Transportable Robotic System) 10.18‰(1) 2005 Stock Option and Incentive Plan and forms of agreements thereunder 10.19#(1) Manufacturing and Services Agreement between the Registrant and Gem City Engineering Corporation, dated as...

  • Page 85
    ...Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. iROBOT CORPORATION By: /s/ Colin M. Angle Colin M. Angle Chief Executive Officer and Director Date: March 16, 2006 POWER... this Annual Report on Form 10-K has been signed by the following persons in...

  • Page 86
    Signature Title(s) /s/ ANDREA GEISSER Andrea Geisser /s/ GEORGE C. MCNAMEE George C. McNamee /s/ PETER MEEKIN Peter Meekin Director Director Director 82

  • Page 87
    ...symbol IRBT. Director, Audit Committee Chair General Paul J. Kern (U.S. Army, Ret.) Director Helen Greiner Co-founder and Chairman of the Board Investor Information A copy of our financial reports, stock quotes, news releases, SEC filings, as well as information on our products is available in...

  • Page 88
    Build cool stuff • Deliver great product • Make money • Have fun • 63 South Avenue Burlington, MA 01803 USA Phone: 781.345.0200 Fax: 781.345.0201 www.irobot.com [email protected]