iRobot 2005 Annual Report Download - page 23

We depend on the U.S. federal government for a significant portion of our revenue, and any reduction in
the amount of business that we do with the U.S. federal government would negatively impact our
operating results and financial condition.
For the years ended December 31, 2005 and December 31, 2004, we derived 28.3% and 20.1% of our total
revenue, respectively, directly or indirectly, from the U.S. federal government and its agencies. Any reduction
in the amount of revenue that we derive from the U.S. federal government without an offsetting 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, 59.7% and
35.9% of our contract revenue was derived from our participation in the U.S. Army's Future Combat Systems
program, respectively. Future sales of our PackBot robots will depend largely on our ability to secure contracts
with the U.S. Army under its robot programs. We expect that there will continue to be only a limited number
of major programs under which U.S. federal government agencies will seek to fund the development of, or
purchase, robots. Our business will, therefore, suffer if we are not awarded, either directly or indirectly through
third-party contractors, government contracts for robots that we are qualified to develop or build. In addition,
if the U.S. federal government or government agencies terminate or reduce the related prime contract under
which we serve as a subcontractor, revenues that we derive under that contract could be lost, which would
negatively impact our business and financial results. Moreover, it is difficult to predict the timing of the award
of government contracts and our revenue could fluctuate significantly based on the timing of any such awards.
Even if we continue to receive funding for research and development under these contracts, there can be
no assurance that we will successfully complete the development of robots pursuant to these contracts or that,
if successfully developed, the U.S. federal government or any other customer will purchase these robots from
us. The U.S. federal government has the right when it contracts to use the technology developed by us to have
robots supplied by third parties. Any failure by us to complete the development of these robots, or to achieve
successful sales of these robots, would harm our business and results of operations.
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
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