iRobot 2011 Annual Report Download - page 63

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Our contracts with the U.S. federal government contain certain provisions that may be unfavorable to us
and subject us to government audits, which could materially harm our business and results of operations.
Our contracts and subcontracts with the U.S. federal government subject us to certain risks and give the
U.S. federal government rights and remedies not typically found in commercial contracts, including rights that
allow the U.S. federal government to:
• terminate contracts for convenience, in whole or in part, at any time and for any reason;
• reduce or modify contracts or subcontracts if its requirements or budgetary constraints change;
• cancel multi-year contracts and related orders if funds for contract performance for any subsequent year
become unavailable;
• exercise production priorities, which allow it to require that we accept government purchase orders or
produce products under its contracts before we produce products under other contracts, which may
displace or delay production of more profitable orders;
• claim certain rights in products provided by us; and
• control or prohibit the export of certain of our products.
Several of our prime contracts with the U.S. federal government do not contain a limitation of liability
provision, creating a risk of responsibility for direct and consequential damages. Several subcontracts with prime
contractors hold the prime contractor harmless against liability that stems from our work and do not contain a
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
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