iRobot 2005 Annual Report Download - page 24

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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.
Government contracts are subject to a competitive bidding process that can consume significant resources
without generating any revenue.
Government contracts are frequently awarded only after formal competitive bidding processes, which are
protracted. In many cases, unsuccessful bidders for government agency contracts are provided the opportunity
to protest certain contract awards through various agency, administrative and judicial channels. If any of the
government contracts awarded to us are protested, we may be required to expend substantial time, effort and
financial resources without realizing any revenue with respect to the potential contract. The protest process
may substantially delay our contract performance, distract management and result in cancellation of the
contract award entirely.
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 on one contract manufacturer, Jetta Company Limited, to manufacture our
consumer products at a single plant in China and rely on one contract manufacturer, Gem City Engineering
Corporation, to manufacture our military products at a single plant in the United States. Moreover, we do not
have a long-term contract with Jetta Company Limited and the manufacture of our consumer products is
provided on a purchase-order basis. 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. To
qualify a new contract manufacturer, familiarize it with our products, quality standards and other require-
ments, and commence volume production 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;
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