iRobot 2010 Annual Report Download - page 62

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limitation of liability. These provisions could cause substantial liability for us, especially given the use to which our
products may be put.
In addition, we are subject to audits by the U.S. federal government as part of routine audits of government
contracts. As part of an audit, these agencies may review our performance on contracts, cost structures and
compliance with applicable laws, regulations and standards. If any of our costs are found to be allocated improperly
to a specific contract, the costs may not be reimbursed and any costs already reimbursed for such contract may have
to be refunded. Accordingly, an audit could result in a material adjustment to our revenue and results of operations.
Moreover, if an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and
suspension or debarment from doing business with the government.
If any of the foregoing were to occur, or if the U.S. federal government otherwise ceased doing business with us
or decreased the amount of business with us, our business and operating results could be materially harmed and the
value of your investment in our common stock could be impaired.
Some of our contracts with the U.S. federal government allow it to use inventions developed under the
contracts and to disclose technical data to third parties, which could harm our ability to compete.
Some of our contracts allow the U.S. federal government rights to use, or have others use, patented inventions
developed under those contracts on behalf of the government. Some of the contracts allow the federal government to
disclose technical data without constraining the recipient in how that data is used. The ability of third parties to use
patents and technical data for government purposes creates the possibility that the government could attempt to
establish additional sources for the products we provide that stem from these contracts. It may also allow the
government the ability to negotiate with us to reduce our prices for products we provide to it. The potential that the
government may release some of the technical data without constraint creates the possibility that third parties may
be able to use this data to compete with us in the commercial sector.
We depend on single source manufacturers, and our reputation and results of operations would be
harmed if these manufacturers fail to meet our requirements.
We currently depend largely on several single source contract manufacturers, for the manufacture of our
various families of home care and government products. All contract manufacturers for our home robots are located
in China. These manufacturers supply substantially all of the raw materials and provide all facilities and labor
required to manufacture our products. If these companies were to terminate their arrangements with us or fail to
provide the required capacity and quality on a timely basis, we would be unable to manufacture our products until
replacement contract manufacturing services could be obtained, which is a costly and time-consuming process. We
cannot assure you that we would be able to establish alternative manufacturing relationships on acceptable terms.
Our reliance on these contract manufacturers involves certain risks, including the following:
• lack of direct control over production capacity and delivery schedules;
• lack of direct control over quality assurance, manufacturing yields and production costs;
• lack of enforceable contractual provisions over the production and costs of consumer products;
• risk of loss of inventory while in transit;
• risks associated with international commerce, including unexpected changes in legal and regulatory
requirements, changes in tariffs and trade policies, risks associated with the protection of intellectual
property and political and economic instability; and
• our attempts to add additional manufacturing resources may be significantly delayed and thereby create
disruptions in production of our products.
Any interruption in the manufacture of our products would be likely to result in delays in shipment, lost sales
and revenue and damage to our reputation in the market, all of which would harm our business and results of
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