iRobot 2007 Annual Report Download - page 67

Program. On February 19, 2008 one auction failed for $2.5 million of our auction rate securities and there is no
assurance that auctions on the remaining auction rate securities in our investment portfolio will succeed in the
future. As a result, our ability to liquidate our investments in the near term may be limited, and our ability to fully
recover the carrying value of our investments may be limited or non-existent. An auction failure means that the
parties wishing to sell securities could not carry out the transaction. All of our auction rate securities, including
those subject to the prior failures, are currently rated AAA, the highest rating available by a rating agency. If the
issuers are unable to successfully close future auctions or their credit ratings deteriorate, we may in the future be
required to record an impairment charge on these investments. We believe we will be able to liquidate our
investments without significant loss but the timing of such an outcome is uncertain. We currently believe these
securities are not significantly impaired, primarily due to the government backing of the underlying securities.
However, it could take until the final maturity of the underlying notes (up to 40 years) to realize our investments’
recorded value. Based on our expected operating cash flows, and our other potential sources of cash, including our
available line of credit, we do not anticipate that the potential lack of liquidity on these investments in the near-term
will affect our ability to execute our current business plan.
State and local taxing authorities may determine that we are required to collect and remit sales tax in
additional jurisdictions.
We collect and remit sales tax in states in which we have a physical presence or in which we believe nexus
exists, which obligates us to collect sales tax. Other states may, from time to time, claim that we have state-related
activities constituting a sufficient nexus to require such collection. Additionally, many other states seek to impose
sales tax collection obligations on companies that sell goods to customers in their state, or directly to the state and its
political subdivisions, even without a physical presence. A successful assertion by one or more states that we should
collect sales tax on the sale of merchandise could result in substantial tax liabilities related to past sales.
Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales
and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress,
have been considering initiatives that could limit or supersede the Supreme Court’s position regarding sales and use
taxes on Internet sales. If any of these initiatives were successful, we could be required to collect sales and use taxes
in additional states, which could result in substantial tax liabilities and penalties in connection with past sales.
Our income tax provision and other tax liabilities may be insufficient if taxing authorities are successful
in asserting tax positions that are contrary to our position. Additionally, there is no guarantee that we will
realize our deferred tax assets.
From time to time, we are audited by various federal, state and local authorities regarding income tax matters.
Significant judgment is required to determine our provision for income taxes and our liabilities for federal, state,
local and other taxes. Although we believe our approach to determining the appropriate tax treatment is supportable
and in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” and
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” it is possible that the final tax authority
will take a tax position that is materially different than that which is reflected in our income tax provision. Such
differences could have a material adverse effect on our income tax provision or benefit, in the reporting period in
which such determination is made and, consequently, on our results of operations, financial position and/or cash
flows for such period.
At December 29, 2007 we had gross deferred tax assets of $12.9 million and a valuation allowance of
$2.7 million resulting in net deferred tax asset of $10.2 million. Future adjustments, either increases or decreases, to
our deferred tax asset valuation allowance will be determined based upon changes in the expected realization of our
net deferred tax assets. The realization of our deferred tax assets ultimately depends on the existence of sufficient
taxable income in either the carryback or carryforward periods under the tax law. Due to significant estimates
utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is
possible that we will be required to record adjustments to the valuation allowance in future reporting periods. Our
results of operations would be impacted negatively if we determine that increases to our deferred tax asset valuation
allowance are required in a future reporting period.
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Form 10-K