iRobot 2012 Annual Report Download - page 63

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that there will continue to be only a limited number of programs under which U.S. federal government agencies will seek to
fund the development of, or purchase, robots. 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 business and results of operations could be negatively affected by significant changes in the policies and
spending priorities of governments and government agencies, and could result in restructuring charges related to workforce
reductions, excess and obsolete inventory, impairment of asset values or other charges. Many of our government customers are
subject to stringent budgetary constraints and our continued performance under these contracts, or award of additional contracts
from these agencies, could be jeopardized by spending reductions or budget cutbacks at these agencies.
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 defense products. All contract manufacturers for our home robots are located in China. These manufacturers
Form 10-K