iRobot 2007 Annual Report Download - page 55

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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 29, 2007 and December 30, 2006, 45.0% and
59.8% 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. military 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 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.
21
Form 10-K