iRobot 2008 Annual Report Download

Download and view the complete annual report

Please find the complete 2008 iRobot annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 145

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145

Dear Stockholder: April 13, 2009
You are cordially invited to attend the annual meeting of stockholders of iRobot Corporation to be held at
2:00 p.m., local time, on Thursday, May 28, 2009 at iRobot Corporation headquarters located at 8 Crosby
Drive, Bedford, Massachusetts 01730.
At this annual meeting, you will be asked to elect three class I directors for three-year terms, to ratify the
appointment of our independent registered public accountants, and to approve an amendment to the 2005
Stock Option and Incentive Plan and a stock option exchange program for eligible iRobot Corporation
employees, excluding, among others, our executive officers. The board of directors unanimously recommends
that you vote FOR election of the director nominees, FOR ratification of appointment of our independent
registered public accountants, and FOR the amendment to the 2005 Stock Option and Incentive Plan and a
stock option exchange program for eligible employees, excluding, among others, our executive officers.
Details regarding the matters to be acted upon at this annual meeting appear in the accompanying proxy
statement. Please give this material your careful attention.
Whether or not you plan to attend the annual meeting, we urge you to sign and return the enclosed proxy
so that your shares will be represented at the annual meeting. If you attend the annual meeting, you may vote
in person even if you have previously returned your proxy card. Your prompt cooperation will be greatly
appreciated.
Very truly yours,
COLIN M. ANGLE
Chief Executive Officer & Chairman of the Board
Proxy Statement

Table of contents

  • Page 1
    ... three-year terms, to ratify the appointment of our independent registered public accountants, and to approve an amendment to the 2005 Stock Option and Incentive Plan and a stock option exchange program for eligible iRobot Corporation employees, excluding, among others, our executive officers. The...

  • Page 2
    ... Corporation: The annual meeting of stockholders of iRobot Corporation, a Delaware corporation (the "Company"), will be held on Thursday, May 28, 2009, at 2:00 p.m., local time, at iRobot Corporation headquarters located at 8 Crosby Drive, Bedford, Massachusetts 01730, for the following purposes...

  • Page 3
    ..., May 28, 2009, at 2:00 p.m., local time, at iRobot Corporation headquarters located at 8 Crosby Drive, Bedford, Massachusetts 01730, and any adjournments or postponements thereof. An annual report to stockholders, containing financial statements for the fiscal year ended December 27, 2008, is being...

  • Page 4
    ... (iii) by each named executive officer of the Company; and (iv) by all directors and executive officers of the Company as a group. Unless otherwise noted below, the address of each person listed on the table is c/o iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730. Shares Beneficially...

  • Page 5
    ... knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Pursuant to the rules of the Securities and Exchange Commission, the number of shares of...

  • Page 6
    ... our chairman of the board and chief executive officer. The board of directors is also composed of (i) three class II directors (Helen Greiner, George C. McNamee and Peter T. Meekin), whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held...

  • Page 7
    ... of our home robots division since April 2009. Prior to joining iRobot, Mr. Beck served at AMETEK Corporation as senior vice president and general manager, Aerospace & Defense from 2008 to 2009 and as vice president & general manager, Power Systems and Instruments Division from 2004 to 2008. From...

  • Page 8
    ...Brooks held various positions at iRobot since our inception, including chief technology officer from June 1997 until September 2008, and prior to that, treasurer and president. In September 2008, Dr. Brooks co-founded Heartland Robotics to develop low-cost industrial robots that will empower workers...

  • Page 9
    ... Cybernetics, a company commercializing Jet Propulsion Laboratory technology. She has been honored by Technology Review Magazine as an "Innovator for the Next Century." Ms. Greiner holds a B.S. in Mechanical Engineering and an M.S. in Computer Science, both from MIT. George C. McNamee has served as...

  • Page 10
    ... the expectation that other members of the board of directors, and of management, will be requested to take part in the process as appropriate. Generally, the nominating and corporate governance committee identifies candidates for director nominee in consultation with management, through the use of...

  • Page 11
    ... as follows: For communications directed to the board of directors as a whole, security holders may send such communications to the attention of the chairman of the board of directors by U.S. mail (including courier or expedited delivery service) to: iRobot Corporation 8 Crosby Drive Bedford...

  • Page 12
    ...at the Corporate Governance section of our website at http://www.irobot.com. A copy of the Code of Business Conduct and Ethics may also be obtained, free of charge, from us upon a request directed to: iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730, Attention: Investor Relations. We...

  • Page 13
    ...(m) of the Internal Revenue Code. Mr. McNamee serves as the chairman of the compensation committee. The compensation committee's responsibilities include: • annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer; • evaluating the...

  • Page 14
    ... at the Corporate Governance section of our website at http://www.irobot.com. Compensation Committee Interlocks and Insider Participation During 2008, Dr. Chwang, Gen. Kern and Mr. McNamee served as members of the compensation committee. No member of the compensation committee was an employee or...

  • Page 15
    ... public accounting firm, with and without management present, to discuss the results of their examinations; their evaluations of the Company's internal control, including internal control over financial reporting; and the overall quality of the Company's financial reporting. Based on its review...

  • Page 16
    ... the Company's cash incentive, stock option and employee stock purchase plans. The compensation committee sets performance goals and objectives for the chief executive officer and the other executive officers, evaluates their performance with respect to those goals and sets their compensation based...

  • Page 17
    ... with performance goals that are directly linked to our annual plan for growth and profit. We believe that the compensation of our named executive officers should reflect their success as a management team, rather than as individuals, in attaining key operating objectives, such as revenue growth and...

  • Page 18
    ..., for each named executive officer. Our compensation plans are developed, in part, by utilizing publicly available compensation data and subscription compensation survey data for national and regional companies in the technology, defense, household durables and robotics industries. We believe that...

  • Page 19
    ... our business needs. In light of the considerations discussed above, for fiscal year 2008, the annual base salaries of our chief executive officer, chief financial officer, president, government & industrial robots, senior vice president and general counsel and vice president, financial controls and...

  • Page 20
    ... awards under our Senior Executive Incentive Compensation Plan for each of our named executive officers, as a percentage of base salary, were 85% for our chief executive officer, 65% for our chief financial officer, 65% for the president of our Government & Industrial Robots division, 50% for our...

  • Page 21
    ... Senior Executive Incentive Compensation Plan, and the comparable cash incentive compensation of companies within our peer group. Based on these factors, the compensation committee determined that our chief executive officer, chief financial officer, president, government & industrial robots, senior...

  • Page 22
    ...days' written notice. Tax Deductibility of Executive Compensation In general, under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, we cannot deduct, for federal income tax purposes, compensation in excess of $1,000,000 paid to certain executive officers. This deduction...

  • Page 23
    ... The following table sets forth summary compensation information for the Company's chief executive officer, chief financial officer and the three other most highly compensated executive officers: SUMMARY COMPENSATION TABLE Salary ($) Stock Awards ($)(1) Option Awards ($)(1) Non-Equity Incentive Plan...

  • Page 24
    ... Services and Departure Agreement dated April 30, 2008, equal to $83,460. Grants of Plan-Based Awards in 2008 The following table sets forth, for each of the named executive officers, information about grants of planbased awards during 2008. GRANTS OF PLAN-BASED AWARDS - 2008 All Other Stock...

  • Page 25
    ... the terms of the plan as adopted by the compensation committee. Target cash incentives for named executive officers are generally targeted at the 50th percentile of similar cash incentives provided to officers in peer companies reviewed by the compensation committee in the technology and robotics...

  • Page 26
    ... the other elements of the officer's compensation, as well as our compensation objectives and policies described above. In 2007 and 2008, stock options and restricted stock awards were granted to our named executive officers, as noted in the "Grants of Plan-Based Awards-2008" table above. There were...

  • Page 27
    ... of Securities Underlying Unexercised Option Options Exercise (#) Price Unexercisable ($) Stock Awards Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Name Option Expiration Date Colin M. Angle...John J. Leahy ...Joseph...

  • Page 28
    ... based on the difference between the fair market value of our common stock on the date of exercise and the exercise price of the options in accordance with regulations promulgated under the Exchange Act. Potential Benefits Upon Termination or Change in Control Severance and Change in Control...

  • Page 29
    ... Section 409A of the Internal Revenue Code of 1986, as amended, and acceleration of vesting as set forth in the below table. The following table provides the market value (that is, the value based upon our stock price on December 27, 2008, minus the exercise price) of stock options that would become...

  • Page 30
    ... our 2005 Plan. In 2008, each of our non-employee members of our board of directors was entitled to the following equity compensation: upon the initial election to the board of directors of a non-employee member would receive a one-time option to purchase 40,000 shares of our common stock under our...

  • Page 31
    ... as part of our Annual Report on Form 10-K for the fiscal year ended December 27, 2008 for certain assumptions made in the valuation of stock and option awards. (4) The non-employee members of our board of directors who held such position on December 27, 2008 held the following aggregate number of...

  • Page 32
    ... their immediate family had or will have a direct or indirect material interest. Our board of directors has adopted a written related party transaction approval policy, which sets forth our polices and procedures for the review, approval or ratification of any transaction required to be reported in...

  • Page 33
    ... 2009 fiscal year. PricewaterhouseCoopers LLP has served as our independent registered public accounting firm since 1999. The audit committee reviewed and discussed its selection of, and the performance of, PricewaterhouseCoopers LLP for our 2008 fiscal year. As a matter of good corporate governance...

  • Page 34
    ...international tax compliance. All Other Fees All other fees include licenses to technical accounting research software. The audit committee has determined that the provision of services... THE RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS iROBOT'S INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR 2009. 32

  • Page 35
    ... Global Market ("NASDAQ") for the business day on which the Option Exchange Program closes (the "Trailing Average Price"). The opportunity to participate in the Option Exchange Program will be offered to all of our domestic employees, excluding, among others, our executive officers, (collectively...

  • Page 36
    ... and develop our business and satisfy customer needs. Competition for many of these employees, particularly in the high-tech industry, is intense and many companies use stock options as a means of attracting, motivating and retaining their best employees. At our company, stock options constitute...

  • Page 37
    ... who have out-of-themoney stock options, the compensation committee engaged an independent compensation consultant, DolmatConnell & Partners, to review and evaluate strategies to address this issue, including providing specific recommendations for the Option Exchange Program parameters. Based on its...

  • Page 38
    ...of which options to purchase approximately 1,398,592 shares, would be eligible for exchange under the Option Exchange Program (assuming a Trailing Average Price of $13.00). Eligibility. The Option Exchange Program will be open to all of our domestic employees, except our executive officers, who hold...

  • Page 39
    ... if we were commencing the exchange offer based on fair market value of $8.40 per share. We will apply the same methodology once these factors are decided closer to the time of commencement of the Option Exchange Program. The total number of shares of our common stock underlying a New Option that an...

  • Page 40
    ...options as well as any incremental compensation cost of the stock options granted in the Option Exchange Program. The incremental compensation cost will be measured as the excess, if any, of the fair value of each New Option granted to employees for the exchanged Eligible Options, measured as of the...

  • Page 41
    ... Program should be treated as a non-taxable exchange, and no income should be recognized for United States federal income tax purposes by us or our employees upon the grant of the New Options. However, the Internal Revenue Service is not precluded from adopting a contrary position, and the laws...

  • Page 42
    ... the 2005 Plan. The compensation committee currently consists of the following members of our board of directors: George McNamee, Paul J. Kern and Ronald Chwang. The compensation committee may delegate to any other executive officer the authority to grant awards at fair market value to employees who...

  • Page 43
    ... acceptable to the compensation committee, or by delivery (or attestation to the ownership) of shares of our common stock purchased by the optionee in the open market or held by the optionee for a minimum specified period. Subject to applicable law, the exercise price may also be delivered to us by...

  • Page 44
    ... price of our common stock, (6) sales or market share or (7) earnings per share. The compensation committee will select the particular performance criteria within 90 days following the commencement of a performance cycle. Tax Withholding. Participants in the 2005 Plan are responsible for the payment...

  • Page 45
    ...limited to the extent that the chief executive officer, or other named executive officers, receives compensation in excess of $1 million a year (other than performance-based compensation that otherwise meets the requirements of Section 162(m) of the Code). The 2005 Plan is structured to allow grants...

  • Page 46
    ... Price Range ($) Name(1) Dollar Value ($)(2) All current employees who are not executive officers, as a group ... 1,398,592 $13.07 - $34.98 * (1) Our executive officers and members of our board of directors are not eligible to participate in the Option Exchange Program. (2) The dollar value...

  • Page 47
    ... proposals by Certified Mail, Return Receipt Requested, to iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730, Attention: Secretary. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own...

  • Page 48
    ... sharing an address. If your household has received only one Annual Report and one proxy statement, we will deliver promptly a separate copy of the Annual Report and the proxy statement to any shareholder who sends a written request to iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730...

  • Page 49
    ... 10-K iROBOT CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 77-0259 335 (I.R.S. Employer Identification No.) 8 Crosby Drive, Bedford, MA (Address of principal executive offices) 01730 (Zip Code) (781...

  • Page 50
    ..., Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Directors Independence ...Principal Accounting Fees and Services ...Part IV...

  • Page 51
    ..., mobility, manipulation and artificial intelligence to build industry-leading robots. Our Roomba floor vacuuming robots, Scooba floor washing robots and Looj gutter cleaning robot perform time-consuming domestic chores. Our PackBot and Small Unmanned Ground Vehicle (SUGV) tactical ground military...

  • Page 52
    ... and to offer a broad product line to our customers. Within the consumer market, we offer floor cleaning products for various surfaces at multiple price points, a gutter cleaning product, a pool cleaning product, and a number of product accessories. We are extending our military robot offerings. In...

  • Page 53
    ... AWARE Robot Intelligence Systems are code bases that enable the behavioral control of robots. Moreover, the AWARE systems include modules that control behaviors, sensor fusion, power management and communication. Our AWARE systems allow our Roomba floor vacuuming robot and our Scooba floor washing...

  • Page 54
    ... offer multiple Roomba models with various features. The suggested retail price for the Roomba robots range from $129 to $549 depending on model, configuration and accessory packages. Scooba, our second major consumer product line, is the first floor washing robot available for home use. Our Scooba...

  • Page 55
    ... batteries, remote control and other accessories. The suggested retail price for the Create ranges from $129 to $299. Government and Industrial Products Form 10-K In government and industrial product markets, we currently offer both ground and underwater unmanned vehicles. Our tactical ground...

  • Page 56
    ...any cost overrun. Government funding is provided to further the development of robot technologies to solve various in-field challenges and with the expectation that if the projects result in the development of technically viable prototypes, then the government will purchase multiple production units...

  • Page 57
    ... operations, through real-time network centric communications and systems of a family of manned vehicles and unmanned platforms by the next decade. The FCS program combines advanced technologies, organizations, people and processes with concepts to create new sources of military power that are more...

  • Page 58
    ... that offer specialized technological expertise. The PackBot, the Roomba and the Scooba robots are designed with open interfaces that allow third-party designers to add sensors or other functionality to our robots. Sales and Distribution Channels We sell our products through distinct sales channels...

  • Page 59
    ...consumer products through distributors and our website supported by our international sales team. Our consumer distribution strategy is intended to increase our global penetration and presence while maintaining high quality standards to ensure end-user satisfaction. Government and Industrial We sell...

  • Page 60
    ...role in supporting brand awareness, addressing customer questions and serving as a showcase for our products. Our home robots and accessories are also sold domestically and internationally through our on-line store. In 2008, the on-line store was the single largest outlet of our home robots division...

  • Page 61
    ... new products over the next few years that will continue to address our existing market sectors. Form 10-K Team Organization Our research and development is conducted by small teams dedicated to particular projects, examples of which include the Roomba team, Scooba team, Warrior team and PackBot...

  • Page 62
    ... we send engineers in the field with our PackBot tactical military robots to solicit feedback from users which is often times incorporated into future product development and product enhancements. Leveraged Model Our research and development efforts for our next-generation products are supported by...

  • Page 63
    ... working on unmanned systems such as Lockheed Martin Corporation, The Boeing Company, BAE Systems, Inc. and General Dynamics Corporation. While we believe many of our customers purchase our Roomba floor vacuuming robots and Scooba floor washing robots as a supplement to, rather than a replacement...

  • Page 64
    ... 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 65
    ...in Hong Kong, the United Kingdom, China 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 on Form 10-K, Quarterly Reports on Form 10-Q, Current...

  • Page 66
    ...: • seasonality in the sales of our consumer products; • the size and timing of orders from retail stores for our home care robots; • the size and timing of orders from military and other government agencies; • the mix of products that we sell in the period; • disruption of supply of our...

  • Page 67
    ... any particular quarter and from sales of our consumer products includes many challenges. Chain stores and other national retailers typically place orders for the holiday season in the third quarter and early in the fourth quarter. The timing of these holiday season shipments could materially affect...

  • Page 68
    ... 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 27, 2008 and...

  • Page 69
    ... Kin Yat Industrial Co Limited, to manufacture our Roomba 500 series of home robot products at a single plant in China. Moreover, we rely on one contract manufacturer, Gem City Engineering and Manufacturing, to manufacture our PackBot products at a single plant in the United States. In 2009, we will...

  • Page 70
    ... results. We have focused on selling our robots in the home floor care and military markets. We plan to expand into other markets. For example, we have devoted significant time and incurred expenses in connection with the development of our Looj gutter cleaning robot. In addition, we have devoted...

  • Page 71
    ...: • changes in government programs that are related to our products and services; • adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations; • changes in political or public support for security and defense programs; • delays or...

  • Page 72
    ... a division of Northrop Grumman Corporation; and • established government contractors working on unmanned systems such as Lockheed Martin Corporation, the Boeing Company, BAE Systems, Inc. and General Dynamics Corporation. In the event that the robot market expands, we expect that competition will...

  • Page 73
    ... from other purposes. Our robots rely on the interplay among behavior-based artificially intelligent systems, real-world dynamic sensors, user-friendly interfaces and tightly-integrated, electromechanical designs to accomplish their missions. Despite testing, our new or existing products have...

  • Page 74
    ... correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to forego purchases of our products and purchase our competitors' products. Moreover, the development of new products has required...

  • Page 75
    ... to collect amounts related to previous purchases by that distributor, all of which could harm our business and financial condition. Disruption of the iRobot on-line store could also decrease our home care robot sales. If we fail to enhance our brand, our ability to expand our customer base will be...

  • Page 76
    ...management team and key technical employees, such as our project management personnel and senior engineers. Moreover, we often must comply with provisions in government contracts that require employment of persons with specified levels of education and work experience. Each of our executive officers...

  • Page 77
    ...of the government creates the potential that third parties may be able to use this data to compete with us in the commercial sector. If we fail to protect our intellectual property and other proprietary rights, our business, results of operations or financial condition could be materially harmed. In...

  • Page 78
    ...continue, we may need additional financing to execute on our current or future business strategies, including to: • hire additional engineers and other personnel; • develop new, or enhance existing, robots and robot accessories; • enhance our operating infrastructure; • acquire complementary...

  • Page 79
    ...which would harm our ability to generate revenue. We must comply with U.S. laws regulating the export of our products. In addition, we are required to obtain a license from the U.S. federal government to export our PackBot, Warrior and SUGV lines of tactical military robots. We cannot be sure of our...

  • Page 80
    ... are required in a future reporting period. Our directors and management will exercise significant control over our company, which will limit your ability to influence corporate matters. As of December 27, 2008, our directors and executive officers and their affiliates collectively beneficially...

  • Page 81
    ...ITEM 2. PROPERTIES UNRESOLVED STAFF COMMENTS Our corporate headquarters are located in Bedford, Massachusetts, where we lease approximately 157,000 square feet. This lease expires on May 1, 2020. We lease 15,700 square feet in Durham, North Carolina supporting our government and industrial division...

  • Page 82
    ... The following table sets forth, for the periods indicated, the high and low sales prices per share for our common stock as reported on the NASDAQ Global Market. High Low Fiscal 2007: First quarter ...Second quarter ...Third quarter ...Fourth quarter ...Fiscal 2008: First quarter ...Second quarter...

  • Page 83
    ... Cost of product revenue ...Cost of contract revenue ...Total cost of revenue...Gross Margin(1)...Operating Expenses Research and development ...Selling and marketing ...General and administrative ...Litigation and related expenses(2) ...Total operating expenses ...Operating (Loss) Income ...Net...

  • Page 84
    ... concerning new product sales, product development and offerings, Roomba, Scooba, Looj and Verro products, PackBot tactical military robots, our home robot and government and industrial robot divisions, competition and strategy and our market position, market acceptance of our products, seasonal...

  • Page 85
    ... programs. Product revenue is derived from the sale of our various home cleaning robots and government and industrial 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...

  • Page 86
    ... from product sales is generated through sales to our retail distribution channels, our distributor network and to certain U.S. and foreign governments. We recognize revenue from the sales of home robots under the terms of agreements with customers upon transfer of title to the customer, net of...

  • Page 87
    ...and related costs for executives and administrative personnel; • advertising, marketing and other brand-building costs; • fulfillment costs associated with direct-to-consumer sales through our on-line store; • customer service costs; • professional services costs; • information systems and...

  • Page 88
    ...of returns. The estimates and reserve for rebates and price protection are based on specific programs, expected usage and historical experience. Actual results could differ from these estimates. Through 2003, we recognized revenue on sales to certain distributors and retail customers upon their sale...

  • Page 89
    ... stock option grants (7 or 10 years) with the associated vesting term (typically 4 to 5 years). Given our initial public offering in November 2005 and the resulting short history as a public company, we could not rely solely on company specific historical data for purposes of establishing expected...

  • Page 90
    ... product sales and inventory levels, obsolescence of technology and product life cycles, we generally write down inventory to net realizable value based on forecasted product demand. Actual demand and market conditions may be lower than those that we project and this difference could have a material...

  • Page 91
    ...Tax Expense (Benefit) ...Net Income ... (1) Stock-based compensation recorded in 2008, 2007 and 2006 breaks down by expense classification as follows. December 27, 2008 Fiscal Year Ended December 29, December 30, 2007 2006 (In thousands) Cost of product revenue ...$ 753 $ 692 $ 326 Cost of contract...

  • Page 92
    ...our home robots division was driven by a $25.3 million increase in home robot revenue due to a 17.4% increase in units shipped and a 1.4% increase in average selling prices, along with a $5.6 million increase in product life cycle revenue (spare parts and accessories). Total home care robots shipped...

  • Page 93
    ... of our military product line into lower priced FasTac units as compared to MTRS (Man Transportable Robot System) units last year, and a $0.7 million decrease in product life cycle revenue (spare parts and accessories). Recurring contract development revenue generated under research and development...

  • Page 94
    ... driven by public relations spending to continue building brand awareness. These increases were partially offset by an overall decrease in selling and marketing expenses of the home robots division of $0.4 million attributed to a decrease of $4.0 million related to our direct response infomercial...

  • Page 95
    ... of receivables due from three of our retail customers given their financial condition and bankruptcy filings, $0.8 million in occupancy and depreciation expenses relating to the move to our new corporate headquarters, $0.5 million in executive severance and $0.2 million of goodwill amortization...

  • Page 96
    ... from our government and industrial division was driven by a $20.0 million increase in military robots revenue due to a 22.3% increase in units shipped and a 20.4% increase in net average selling prices, and a $7.7 million increase in product life cycle revenue (robot spare parts, services and...

  • Page 97
    ...) in fiscal 2006. The $8.7 million increase in the home robot division selling and marketing expense was primarily driven by a $12 million increase in costs associated with our increased direct business, including both website sales and infomercial programs which were run earlier in the year, offset...

  • Page 98
    Government and industrial division selling and marketing expenses were up $2.4 million for fiscal 2007 as compared to fiscal 2006 due primarily to $0.9 million of increased compensation and benefit related expense resulting from the expansion of our sales team, $0.3 million increased travel costs, ...

  • Page 99
    ..., our home robots product inventory consists of goods shipped to our third-party logistic providers for the fulfillment of retail orders and direct-to-consumer sales. Our inventory of government and industrial products is minimal as they are generally built to order. Our contract manufacturers are...

  • Page 100
    ...2003, 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, our...

  • Page 101
    ... and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and enhancements to existing products, the acquisition of new capabilities or technologies, and the continuing market acceptance of our products and services...

  • Page 102
    ... 16,500 $40,884 Our minimum contractual payments consist entirely of payments to our provider of direct fulfillment services for direct to consumer sales of our home robots, which payments are incurred in the ordinary course of business. Based on historical and current operations, we believe that...

  • Page 103
    ... maintain sales and business operations in foreign countries. As such, we have exposure to adverse changes in exchange rates associated with operating expenses of our foreign operations, but we believe this exposure to be immaterial. In late 2007, we began to accept orders for home robot products in...

  • Page 104
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA iROBOT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm...Consolidated Balance Sheets at December 27, 2008 and December 29, 2007 ...Consolidated Statements of Operations for the ...

  • Page 105
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was...

  • Page 106
    ... payable ...$ 19,544 Accrued expenses ...10,989 Accrued compensation ...6,393 Deferred revenue and customer advances ...2,632 Total current liabilities ...Long term liabilities ...Commitments and contingencies (Note 12): Redeemable convertible preferred stock, 5,000 shares authorized and zero...

  • Page 107
    ... Stock-based compensation recorded in 2008, 2007 and 2006 breaks down by expense classification as follows: December 27, 2008 Fiscal Year Ended December 29, December 30, 2007 2006 (In thousands) Cost of product revenue ...Cost of contract revenue ...Research and development ...Selling and marketing...

  • Page 108
    ... ...Vesting of restricted stock units ...Tax benefit of excess stock based compensation deduction ...Amortization of deferred compensation relating to stock options ...Reversal of deferred compensation related to cancelled stock options ...Director's deferred compensation ...Net income ...23,790...

  • Page 109
    ...Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization ...Loss on disposal of fixed assets ...Stock based compensation ...In-process research and development relating to acquisition of Nekton Research LLC ...Benefit from deferred tax...

  • Page 110
    ... iRobot Corporation, formerly IS Robotics, Inc., was incorporated 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...

  • Page 111
    ... from product sales, government research and development contracts, and commercial research and development contracts. The Company sells products directly to customers and indirectly through resellers and distributors. The Company recognizes revenue from sales of home robots under the terms of...

  • Page 112
    ... of cost or net realizable value with cost being determined using the first-in, firstout (FIFO) method. The Company maintains a reserve for inventory items to provide for an estimated amount of excess or obsolete inventory. Activity related to the inventory reserve was as follows: December 27, 2008...

  • Page 113
    ... in relation to the operating performance and future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values are based on estimates of market prices...

  • Page 114
    ... income (expense), net" on the Company's consolidated statements of operations. Stock-Based Compensation Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payment, which establishes accounting for equity instruments exchanged for employee services. Under...

  • Page 115
    ... No. 25 relating to stock options with exercise prices below the retrospectively reassessed fair market value on the date of grant. The Company recognized associated stock-based compensation expense of $0.3 million, $0.2 million and $0.7 million for the fiscal years ended December 27, 2008, December...

  • Page 116
    ... grant date using the Black-Scholes option-pricing model with the following assumptions: Fiscal Year Ended December 27, 2008 Fiscal Year Ended December 29, 2007 Fiscal Year Ended December 30, 2006 Risk-free Expected Expected Expected interest rate ...2.24% - 3.45% dividend yield ...- life ...3.50...

  • Page 117
    ... intrinsic value on the table was calculated based upon the positive difference between the closing market value of the Company's stock on December 27, 2008 of $9.29 and the exercise price of the underlying option. During fiscal years 2008, 2007 and 2006, the total intrinsic value of stock options...

  • Page 118
    ...1.61 - $ 2.77 16.03 2.77 2.77 $10.11 - 6.69 - $16.03 As of December 27, 2008, the unamortized fair value of all restricted stock awards was $0.2 million. The Company expects to recognize associated stock-based compensation expense of $0.1 million and $0.1 million in 2009 and 2010, respectively. 70

  • Page 119
    ... fair value of all restricted stock units was $2.4 million. The Company expects to recognize associated stock-based compensation expense of $0.8 million, $0.7 million, $0.6 million and $0.3 million in 2009, 2010, 2011 and 2012, respectively. Advertising Expense The Company expenses advertising costs...

  • Page 120
    ... monitors the realization of its deferred tax assets based on changes in circumstances, for example recurring periods of income for tax purposes following historical periods of cumulative losses or changes in tax laws or regulations. The Company's income tax provisions and its assessment of the...

  • Page 121
    ...scope of this FSP. This FSP will be adopted by the Company in the first quarter of fiscal year 2009, and is not expected to have a material impact on its consolidated financial statements. In December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations, or SFAS 141R and SFAS No. 160...

  • Page 122
    ... and intangible assets, net. In November 2007, the Company recorded an investment of $2.5 million in a series of preferred stock of Advanced Scientific Concepts, Inc. This investment is accounted for at cost utilizing the cost method. On a going forward basis, the Company will regularly monitor this...

  • Page 123
    ...conditions, operational performance and other specific factors relating to the business underlying the investment. If any such impairment is identified, a reduction in the carrying value of the investment would be recorded at that time. 6. Accrued Expenses Accrued expenses consist of the following...

  • Page 124
    ... set at a price other than the fair market value of the common stock. 10. Income Taxes The components of income tax expense were as follows: 2008 2007 (In thousands) 2006 Current Federal ...State ...Foreign ...Total current tax provision ...Deferred Federal ...Total income tax provision (benefit...

  • Page 125
    ... expected tax (benefit) expense (computed by applying the federal statutory rate to income before income taxes) to actual tax expense was as follows: 2008 2007 (In thousands) 2006 Expected federal income tax ...Permanent items ...State taxes ...Credits ...Non deductible stock compensation ...Other...

  • Page 126
    ... and support of a number of man-portable remote control vehicles for use in explosive ordnance disposal operations. The Company entered into the contract with the Customer on May 23, 2001, and substantially completed the product design and development phase of the work. The Company received payments...

  • Page 127
    ...respectively. The Company recorded $0.7 million of expense in the fiscal year ended December 27, 2008 for remaining lease commitments, net of estimated sublease income, at its former corporate headquarters in Burlington, MA. Future minimum rental payments under operating leases were as follows as of...

  • Page 128
    .... Acquisition of Nekton Research, LLC In September 2008 the Company acquired Nekton, an unmanned underwater robot technology company based in Raleigh, North Carolina. The Company acquired Nekton for a purchase price of $10 million, consisting primarily of cash and direct acquisition costs, with the...

  • Page 129
    ...Company's on-line store. The Company's home robots division 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. government-focused sales...

  • Page 130
    ... ...Other ...Total cost of revenue ...Gross margin: Home Robots ...Government & Industrial ...Other ...Total gross margin ...Research and development Other ...Selling and marketing Other ...General and administrative Other ...Litigation and related expenses Other ...Other income, net Other ...Income...

  • Page 131
    iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 16. Quarterly Information (Unaudited) March 31, 2007 June 30, 2007 Fiscal Quarter Ended September 29, December 29, March 29, June 28, 2007 2007 2008 2008 (In thousands, except per share amounts) September 27, December 27, ...

  • Page 132
    ... of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including our principal executive and financial officers, we assessed the Company's internal control over financial reporting as of December 27, 2008, based on criteria for...

  • Page 133
    ... provided herein, including for revision or termination of an established trading plan, other than in such quarterly and annual reports. Form 10-K PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required under this item is incorporated herein by reference...

  • Page 134
    ...December 27, 2008. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following are filed as part of this Annual Report on Form 10-K: 1. Financial Statements The following consolidated financial statements are included in Item 8: Report of Independent Registered Public Accounting Firm...

  • Page 135
    ... Ground Vehicle) Government Contract N00174-03-D-0003 (Man Transportable Robotic System) 2005 Stock Option and Incentive Plan and forms of agreements thereunder Manufacturing and Services Agreement between the Registrant and Gem City Engineering Corporation, dated as of July 27, 2004 Non-Employee...

  • Page 136
    ... 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 2008 and incorporated by reference herein) Form of Restricted Stock Award Agreement under the 2005 Stock Option and Incentive Plan (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the...

  • Page 137
    ... has duly caused this 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 Chairman of the Board, Chief Executive Officer and Director Date: February 13, 2009 POWER OF ATTORNEY KNOW ALL...

  • Page 138
    Signature Title(s) /s/ GEORGE C. MCNAMEE George C. McNamee /s/ HELEN GREINER Helen Greiner /s/ PETER MEEKIN Peter Meekin /s/ PAUL J. KERN Paul J. Kern Director Director Director Director 90

  • Page 139
    ... Ground Vehicle) Government Contract N00174-03-D-0003 (Man Transportable Robotic System) 2005 Stock Option and Incentive Plan and forms of agreements thereunder Manufacturing and Services Agreement between the Registrant and Gem City Engineering Corporation, dated as of July 27, 2004 Non-Employee...

  • Page 140
    ... by reference herein) 10.23†Senior Executive Incentive Compensation Plan (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2008 and incorporated by reference herein) 10.24†Transitional Services and Departure Agreement by and between the...

  • Page 141
    ...$100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on 11/9/2005 and its relative performance is tracked through 12/31/2008. COMPARISON OF 37 MONTH CUMULATIVE TOTAL RETURN* Among iRobot Corporation, The NASDAQ Composite Index And The...

  • Page 142
    ... Director George C. McNamee Lead Independent Director, Compensation Committee Chair Peter T. Meekin Director Executive Team Colin M. Angle Chief Executive Officer John J. Leahy Executive Vice President, Chief Financial Officer and Treasurer Jeffrey A. Beck President and General Manager, Home Robots...

  • Page 143
    NOTES

  • Page 144
    NOTES

  • Page 145
    iRobot Mission Build cool stuff • Deliver great product • Make money • Have fun • Change the world Corporate Headquarters 8 Crosby Drive Bedford, MA 01730 USA Phone: 781.430.3000 Fax: 781.430.3001 www.irobot.com [email protected]