Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

**(Mark One)**

 
| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the transition period from                   to                   **

 

**Commission File Number 001-33253**

 

**FORCEPROTECTION, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Nevada**                                | ** ** | **84-1383888**       |
|-------------------------------------------|------------|----------------------|
| (State  or Other Jurisdiction of          |       | (I.R.S.  Employer    |
| Incorporation  or Organization)           |       | Identification  No.) |
|                                      |       |                 |
| **1520 Old Trolley Road**                 |       |                 |
| **Summerville, South Carolina**           | ** ** | **29485**            |
| (Address  of Principal Executive Offices) |       | (Zip  Code)          |

 

**(843) 574-7001**

(Registrant’sTelephone Number, Including Area Code)

 

**9801 Highway 78, Building No. 1Ladson, South Carolina 29456**(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     x  Yes     o   No

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).   oYes    o No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

| Large  accelerated filer  o               |   | Accelerated  filer  x         |
|------------------------------------------------|--------|------------------------------------|
|                                           |   |                               |
| Non-accelerated  filer  o                 |   | Smaller  reporting company  o |
| (Do  not check if a smaller reporting company) |   |                               |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  o Yes   x  No

 

Theregistrant had 70,256,360 shares of common stock outstanding as of October 22,2010.

 

 

 

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TABLE OF CONTENTS

 
| **PART I —  FINANCIAL INFORMATION**                                                            |       |       |
|----------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                               | ** ** |       |
| Item  1. Financial Statements                                                                       |       |       |
|                                                                                                     |       |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       |       |
|                                                                                                     |       |       |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                 |       |       |
|                                                                                                     |       |       |
| Item 4. Controls and Procedures                                                                     |       |       |
|                                                                                                     |       |       |
| **PART II  — OTHER INFORMATION**                                                               |       |       |
| ** **                                                                                               | ** ** | ** ** |
| Item  1. Legal Proceedings                                                                          |       |       |
|                                                                                                     |       |       |
| Item  1A. Risk Factors                                                                              |       |       |
|                                                                                                     |       |       |
| Item 2. Unregistered Sales Of Equity Securities  And Use Of Proceeds                                |       |       |
|                                                                                                     |       |       |
| Item 3. Defaults Upon Senior Securities                                                             |       |       |
|                                                                                                     |       |       |
| Item  5. Other Information                                                                               |       |       |
|                                                                                                     |       |       |
| Item  6. Exhibits                                                                                   |       |       |

 

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**PART I.FINANCIAL STATEMENTS**

 

**Item 1.**   **Financial Statements**

 

**Force Protection, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                           | ** ** | **As of September 30,** | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2010**                               | ** ** | **2009**                              | ** ** |
| ** **                                           | ** ** | **(In Thousands)**                | ** ** |
| **Assets**                                           |       |                                   |       |                                  |       |
| **Current assets:**                                  |       |                                   |       |                                  |       |
| Cash and cash equivalents                            |       | $                                      | 105,438    |                                  | $          | 147,254 |   |
| Accounts receivable, net                             |       | 186,607                                |       | 143,480                               |       |
| Inventories                                          |       | 85,850                                 |       | 74,075                                |       |
| Deferred income tax assets                           |       | 8,802                                  |       | 16,235                                |       |
| Income taxes receivable                              |       | 2,945                                  |       | 1,352                                 |       |
| Prepaid income taxes                                 |       | 2,593                                  |       | —                                |       |
| Other current assets                                 |       | 24,376                                 |       | 3,031                                 |       |
| Total current assets                                 |       | 416,611                                |       | 385,427                               |       |
| Property and equipment, net                          |       | 60,814                                 |       | 58,918                                |       |
| Investment in unconsolidated joint venture           |       | 2,309                                  |       | 2,541                                 |       |
| Other assets, net                                    |       | 673                                    |       | 202                                   |       |
| **Total assets**                                     |       | $                                      | 480,407    |                                  | $          | 447,088 |   |
|                                                 |       |                                   |       |                                  |       |
| **Liabilities  and Shareholders’ Equity**       |       |                                   |       |                                  |       |
| **Current liabilities:**                             |       |                                   |       |                                  |       |
| Accounts payable                                     |       | $                                      | 95,676     |                                  | $          | 86,588 |   |
| Due to United States government                      |       | 22,440                                 |       | 25,965                                |       |
| Advance payments on contracts                        |       | 680                                    |       | 1,164                                 |       |
| Other current liabilities                            |       | 42,372                                 |       | 21,044                                |       |
| Total current liabilities                            |       | 161,168                                |       | 134,761                               |       |
| Deferred income tax liabilities                      |       | 1,225                                  |       | 1,236                                 |       |
| Other long-term liabilities                          |       | 458                                    |       | —                                |       |
|                                                 |       | 162,851                                |       | 135,997                               |       |
| Commitments and contingencies                        |       |                                   |       |                                  |       |
|                                                 |       |                                   |       |                                  |       |
| **Shareholders’ equity:**                       |       |                                   |       |                                  |       |
| Common stock                                         |       | 70                                     |       | 70                                    |       |
| Additional paid-in capital                           |       | 262,626                                |       | 260,112                               |       |
| Accumulated other comprehensive income               |       | 32                                     |       | 129                                   |       |
| Retained earnings                                    |       | 54,828                                 |       | 50,780                                |       |
| Total shareholders’ equity                      |       | 317,556                                |       | 311,091                               |       |
| **Total liabilities and  shareholders’ equity** |       | $                                      | 480,407    |                                  | $          | 447,088 |   |

 

The accompanying notes tocondensed consolidated financial statements are an integral part of thesestatements.

 

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**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                       | ** ** | **For the three months ended**                 | ** ** | **For the nine months ended**                  | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **September 30, **                                       | ** ** | **September 30,**                                             | ** ** |
| ** **                                       | ** ** | **2010**                                                           | ** ** | **2009**                                                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                       | ** ** | **(In Thousands, Except Per Share Data)** | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| Net sales                                        |       | $                                                                  | 176,265    |                                                               | $          | 316,164 |   | $ | 448,251 |   | $ | 688,014 |   |
| Cost of sales                                    |       | 142,690                                                            |       | 289,628                                                            |       | 357,605 |   | 598,863 |   |
| Gross profit                                     |       | 33,575                                                             |       | 26,536                                                             |       | 90,646 |   | 89,151 |   |
| General and administrative expenses              |       | 27,868                                                             |       | 19,196                                                             |       | 65,732 |   | 60,219 |   |
| Research and development expenses                |       | 7,314                                                              |       | 4,239                                                              |       | 17,445 |   | 13,736 |   |
| Operating (loss) income                          |       | (1,607                                                             | )          | 3,101                                                              |       | 7,469 |   | 15,196 |   |
| Other (expense) income, net                      |       | (187                                                               | )          | 252                                                                |       | 75 |   | 57 |   |
| Interest expense, net                            |       | (22                                                                | )          | (46                                                                | )          | (216 | ) | (79 | ) |
| (Loss) income before income tax expense          |       | (1,816                                                             | )          | 3,307                                                              |       | 7,328 |   | 15,174 |   |
| Income tax expense                               |       | (48                                                                | )          | (88                                                                | )          | (3,279 | ) | (4,138 | ) |
| Net (loss) income                                |       | $                                                                  | (1,864     | )                                                                  | $          | 3,219 |   | $ | 4,049 |   | $ | 11,036 |   |
| **(Loss) earnings per common share:**            |       |                                                               |       |                                                               |       |   |   |   |   |
| Basic                                            |       | $                                                                  | (0.03      | )                                                                  | $          | 0.05 |   | $ | 0.06 |   | $ | 0.16 |   |
| Diluted                                          |       | $                                                                  | (0.03      | )                                                                  | $          | 0.05 |   | $ | 0.06 |   | $ | 0.16 |   |
| **Weighted average common shares  outstanding:** |       |                                                               |       |                                                               |       |   |   |   |   |
| Basic                                            |       | 68,799                                                             |       | 68,436                                                             |       | 68,753 |   | 68,423 |   |
| Diluted                                          |       | 68,799                                                             |       | 68,863                                                             |       | 69,681 |   | 68,930 |   |

 

The accompanying notes tocondensed consolidated financial statements are an integral part of thesestatements.

 

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**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                         | ** ** | **For the nine months ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** |
| ** **                                                                                         | ** ** | **(In Thousands)**                                                   | ** ** |
| **Cash flows from operating  activities:**                                                         |       |                                                                      |       |   |   |
| Net income                                                                                         |       | $                                                                         | 4,049      |   | $ | 11,036 |   |
| Adjustments to reconcile net income to net cash  (used in) provided by operating activities – |       |                                                                      |       |   |   |
| Depreciation and amortization                                                                      |       | 12,099                                                                    |       | 10,285 |   |
| Deferred income tax provision                                                                      |       | 7,475                                                                     |       | (2,132 | ) |
| Income tax effect realized from stock transactions                                                 |       | (11                                                                       | )          | — |   |
| Stock-based compensation                                                                           |       | 2,486                                                                     |       | 2,126 |   |
| Provision for asset impairment                                                                     |       | —                                                                    |       | 748 |   |
| Provision for estimated litigation settlement                                                      |       | 8,500                                                                     |       | — |   |
| Provision for inventory                                                                            |       | 3,084                                                                     |       | 19,791 |   |
| Loss on disposal of property and equipment                                                         |       | 5                                                                         |       | 166 |   |
| Equity in loss of unconsolidated joint venture                                                     |       | 101                                                                       |       | 315 |   |
| Increase in assets –                                                                          |       |                                                                      |       |   |   |
| Accounts receivable                                                                                |       | (43,127                                                                   | )          | (78,454 | ) |
| Inventories                                                                                        |       | (11,716                                                                   | )          | (45,136 | ) |
| Advances to subcontractor                                                                          |       | —                                                                    |       | (5,192 | ) |
| Prepaid income taxes                                                                               |       | (2,593                                                                    | )          | (4,572 | ) |
| Income taxes receivable                                                                            |       | (1,593                                                                    | )          | — |   |
| Other assets                                                                                       |       | (1,662                                                                    | )          | (1,777 | ) |
| Increase (decrease) in liabilities –                                                          |       |                                                                      |       |   |   |
| Accounts payable                                                                                   |       | 5,866                                                                     |       | 90,899 |   |
| Due to United States government                                                                    |       | (3,525                                                                    | )          | (5,255 | ) |
| Advance payments on contracts                                                                      |       | (484                                                                      | )          | 35,751 |   |
| Other liabilities                                                                                  |       | (6,843                                                                    | )          | (6,675 | ) |
| Total adjustments                                                                                  |       | (31,938                                                                   | )          | 10,888 |   |
| **Net cash (used in) provided by  operating activities**                                           |       | (27,889                                                                   | )          | 21,924 |   |
| **Cash flows from investing  activities:**                                                         |       |                                                                      |       |   |   |
| Capital expenditures                                                                               |       | (12,307                                                                   | )          | (8,740 | ) |
| Purchases of marketable securities                                                                 |       | —                                                                    |       | (9,996 | ) |
| Proceeds from the sale of fixed assets                                                             |       | 22                                                                        |       | — |   |
| Purchase of JAMMA assets                                                                           |       | (1,650                                                                    | )          | — |   |
| Investment in unconsolidated joint venture                                                         |       | —                                                                    |       | (2,149 | ) |
| **Net cash used in investing  activities**                                                         |       | (13,935                                                                   | )          | (20,885 | ) |
| **Cash flows from financing  activities:**                                                         |       |                                                                      |       |   |   |
| Proceeds from issuance of common stock                                                             |       | 17                                                                        |       | 37 |   |
| Income tax effect realized from stock transactions                                                 |       | 11                                                                        |       | — |   |
| Net decrease in other long-term liabilities                                                        |       | —                                                                    |       | (128 | ) |
| **Net cash provided by (used in)  financing activities**                                           |       | 28                                                                        |       | (91 | ) |
| **Effect of foreign currency rate  changes on cash**                                               |       | (20                                                                       | )          | — |   |
| **(Decrease) increase in cash and  cash equivalents**                                              |       | (41,816                                                                   | )          | 948 |   |
| **Cash and cash equivalents at  beginning of year**                                                |       | 147,254                                                                   |       | 111,001 |   |
| **Cash and cash equivalents at end  of period**                                                    |       | $                                                                         | 105,438    |   | $ | 111,949 |   |
| **Supplemental cash flow  information:**                                                           |       |                                                                      |       |   |   |
| Cash paid during the period for                                                                    |       |                                                                      |       |   |   |
| Income taxes                                                                                       |       | $                                                                         | 6,975      |   | $ | 15,134 |   |
| Interest, net of amounts capitalized                                                               |       | $                                                                         | 232        |   | $ | 113 |   |
| **Supplemental schedule of noncash  investing and financing activities:**                          |       |                                                                      |       |   |   |
| Property and equipment additions in accounts  payable                                              |       | $                                                                         | 1,029      |   | $ | 1,009 |   |

 

The accompanying notes tocondensed consolidated financial statements are an integral part of thesestatements.

 

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1.     Summary of Significant Accounting Policies

 

***Organization and Description of the Business***

 

Force Protection, Inc.provides survivability solutions to support the armed forces of the UnitedStates and its allies.  We design,manufacture, test, deliver and support our blast- and ballistic-protectedproducts to increase survivability for the users of our products.  Our specialty vehicles, which we believe areat the forefront of blast- and ballistic-protected technology, are designed toprotect their occupants from landmines, hostile fire, and improvised explosivedevices (IEDs).  We are a key provider ofthe U.S. military’s Mine Resistant Ambush Protected (MRAP) vehicle program andhave sold and delivered over 3,000 vehicles under this program.  We also provide our Cougar and Buffalomine-protected vehicles to several foreign customers, including the UnitedKingdom Ministry of Defence (U.K. MoD) which has purchased three variants ofour Cougar vehicle.  Complementing theseefforts, we are developing and marketing new vehicle platforms, including theOcelot and the Joint All-Terrain Modular Mobility Asset (JAMMA), that provideincreased modularity, speed and mobility. Across all vehicle programs we have sold approximately 4,600 vehiclessince 2005.  Supporting our vehicledesign, development and production initiatives, we develop, manufacture, test,deliver and support products and services aimed at further enhancing thesurvivability of our users against additional threats.  Capitalizing on our strengths insurvivability solutions, we are focused on developing additional products toprotect against rocket-propelled grenades and under-body armor kits to mitigateblast effects on military vehicles.  Wealso provide long-term life cycle support services for our vehicles thatinvolve development of technical data packages, supply of spares, field anddepot maintenance activities, assignment of highly-skilled field servicerepresentatives, and advanced off-road driver and maintenance trainingprograms.  Our services are based onestablishing and maintaining long-term relationships with the U.S. governmentand foreign military users.

 

References herein to “ForceProtection,” the “Company,” “we,” “our” or “us” refer to ForceProtection, Inc. and its subsidiaries unless otherwise stated or indicatedby context.

 

In2009, we formed Integrated Survivability Technologies Limited, an England andWales company, referred to as IST, a joint venture between Force ProtectionEurope Limited, a subsidiary of Force Protection Industries, Inc., and NPAerospace Limited, a subsidiary of The Morgan Crucible Company plc. Pursuant to the terms of the joint venture, IST acts as the prime contractorfor vehicles and related total life cycle support awarded by the U.K. MoD toensure that this customer has a single point of contact for its Wolfhound,Buffalo, Mastiff and Ridgback vehicles.  We account for this joint ventureas an equity-method investment.  InSeptember 2009, we formed Force Protection Australasia Pty Ltd, an Australiancompany, to pursue market opportunities in Australia and Asia.  Force Protection Australasia Pty Ltd is awholly owned subsidiary of Force Protection Europe Limited.

 

As part of ourcomprehensive business development efforts, we are pursuing a number ofsubstantial vehicle programs in several countries worldwide.  Notable examples include:

 

*LightProtected Patrol Vehicle (LPPV).*  Through ForceProtection Europe Limited, we have developed with a subcontractor (Ricardo U.K.Limited) a new vehicle platform called the Ocelot.  The Ocelot is a light-weight protectedvehicle that provides increased modularity, speed, mobility and off-roadcapability with MRAP-like survivability qualities.  The vehicle wassubmitted by Force Protection Europe Limited to the U.K. MoD for the LPPVcompetition as an Urgent Operational Need for use by the U.K. forces inAfghanistan.  In September 2010, Force Protection Europe Limited wasselected as the preferred bidder for the supply of the Ocelot under the LPPVprogram.  The LPPV program requirement isinitially for at least 200 vehicles and related long-term support services.

 

*Land 121 Protected MobilityVehicle-Light (PMV-L).* The Ocelot was proposed in September 2009 byForce Protection Europe Limited to the Commonwealth of Australia for one of thePMV-L requirements found in the Land 121 Phase IV project.  In May 2010,we were formally notified that the Ocelot vehicle was selected as one of threefunded competitors to continue competitive prototyping in stage one of theManufactured and Supported in Australia (MSA) option for Land 121.  ForceProtection Europe Limited entered into a contract on July 23, 2010 to build anddeliver two Ocelot prototypes with accompanying documentation, as well as testand evaluation support.  Two prototypes of the Ocelot vehicles arescheduled to be delivered in February 2011.  The value of the contract isnot-to-exceed $9.9 million Australian dollars.  In addition to the Land121 PMV-L option, the Australian government has collaborated with the U.S.government on the development of the Joint Light Tactical Vehicle (JLTV).  The contract and evaluation period for thePMV-L competitive stage is currently scheduled to conclude by the second halfof 2011, at which point the Commonwealth of Australia is expected to make adecision on whether to continue

 

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withthe stage two MSA prototyping for an additional six vehicles, JLTV, or continuewith both options.  The Australiangovernment is expected to make a final program selection in the second half of2012 and source for production.  The PMV-L program requirement is forapproximately 1,300 vehicles, trailers and related long-term support service.

 

*Joint All-Terrain Modular MobilityAsset (JAMMA).*The JAMMA is a light-weight, hybrid,high-performance, high-speed, all-terrain vehicle that is transportable insidea V-22 Osprey and features an attachment system for threat-specificarmor.  The JAMMA was specifically developed and designed to meet anupcoming customer requirement by the United States Air Force’s Guardian AngelAir-Deployable Rescue Vehicle (GAARV) program, but will have application to amultitude of Special Operations Command programs both domestically andworldwide.  It is currently anticipated that the Air Combat Command willissue a Request for Proposal (RFP) for the GAARV program by the end of2010.  The JAMMA is designed to be anair-droppable, surface recovery vehicle capable of maneuvering over adverseterrain in order to search for and recover isolated personnel andequipment.  The JAMMA also is designed to transport recovery teams andrecovered ambulatory or wounded personnel from isolated high threat areas todefendable locations for extraction by aircraft or self-recovery to a final,secure destination.  The GAARV program requirementis expected to be for 56 vehicles and associated logistics support.

 

*TacticalArmored Patrol Vehicle (TAP-V).*  The TAP-V program,sponsored by the Canadian Department of National Defense, is the program thatthe Canadian military is expected to utilize to replace the Coyote and RG-31. Vehicle requirements must satisfy the following mission profiles:Reconnaissance and Surveillance, Security, Command and Control, Cargo andArmored Personnel Carrier.  The vehicle selected for the TAP-V programmust possess a high degree of mobility as well as a high degree of protectionfor the crew.  Additionally, this program will be built on a MilitaryOff-The-Shelf solution.  Similar to the LPPV and Land 121 PMV-L programs,the TAP-V program requires vehicle production to be based in-country.  InJune 2010, Force Protection supplied two possible solutions for the TAP-Vprogram, a Cougar 4x4 variant and Cougar 6x6 variant.  In July 2010, bothof our vehicle solutions were selected to move into the RFP phase of theprocurement process, along with seven other vehicles from other equipmentmanufacturers.  On November 1, 2010,the TAP-V Project Management Office published the draft RFP.   A contract award to the final selectedbidder is expected in late 2011.  The TAP-V program requirement is for approximately600 vehicles and related long-term support services.

 

***Basis of Presentation and Consolidation***

 

The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withour audited consolidated financial statements included in our Annual Report onForm 10-K for the year ended December 31, 2009 filed with the UnitedStates Securities and Exchange Commission (SEC) on March 8, 2010.  These unaudited condensed consolidatedfinancial statements have been prepared pursuant to Rule 10-01 ofRegulation S-X.  Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America (GAAP) have been condensed or omitted pursuant to thoserules and regulations, although we believe that the disclosures madeherein are adequate to make the information not misleading.

 

The unaudited results ofoperations for the interim periods shown in these condensed consolidatedfinancial statements are not necessarily indicative of operating results forthe entire year. In our opinion, the accompanying unaudited condensedconsolidated financial statements recognize all adjustments of a normalrecurring nature considered necessary to fairly state the financial position,results of operations and cash flows for each interim period presented.

 

These unaudited condensedconsolidated financial statements include the assets, liabilities, revenues andexpenses of our wholly owned subsidiaries, Force ProtectionIndustries, Inc. and Force Protection Technologies, Inc.  We eliminate from our financial results allsignificant intercompany accounts and transactions.

 

***Fair Value of Financial Instruments***

 

FinancialAccounting Standard Board (FASB) Statement No. 107, *Disclosures about Fair Value of Financial Instruments*,which was primarily codified into Topic 825, “*FinancialInstruments*” in the Accounting Standards Codification (ASC),requires disclosures of the fair value of financial instruments.  Our financial instruments include cash andcash equivalents, accounts receivable, accounts payable, accrued liabilitiesand amounts due to United States government. The carrying amounts of cash and cash equivalents, accounts receivable,accounts payable,

 

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accruedliabilities and amounts due to the United States government, approximate theirfair value because of the short-term maturity and highly liquid nature of theseinstruments.  The carrying values of ourfinancial instruments approximate their fair value as of September 30, 2010 andDecember 31, 2009.

 

***Recent Accounting Pronouncements***

 

In October 2009, the FASBissued Update No. 2009-13 (ASU 2009-13), an update to Topic 605 “*Revenue Recognition*,” which addresses the accounting formultiple-deliverable arrangements to enable vendors to account for products orservices (deliverables) separately rather than as a combined unit.  ASU 2009-13 is effective prospectively forrevenue recognition arrangements entered into or materially modified beginningin fiscal years on or after June 15, 2010. Early adoption is permitted.  Weare currently evaluating the impact that the adoption of this guidance willhave on our consolidated financial position, results of operations or cashflows, if any.

 

In February 2010, the FASBissued Update No. 2010-9 (ASU 2010-9), an update to Topic 855 “*Subsequent Events*,” which clarified that subsequent eventsshould be evaluated through the date the financial statements are issued.  In addition, this update no longer requires afiler to disclose the date through which subsequent events have been evaluated.  This guidance is effective for financialstatements issued subsequent to February 26, 2010.  We adopted this guidance on March 8,2010.  This guidance did not have amaterial impact on our consolidated financial position, results of operationsor cash flows.

 

We have determined that allother recently issued accounting guidance will not have a material impact onour consolidated financial position, results of operations and cash flows, ordo not apply to our operations.

 

**2.**    **Accounts Receivable**

 

Accounts receivable consistof the following (in thousands):

 
| ** **                | ** ** | **As of September 30,  2010** | ** ** | **As of December 31,  2009** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| United States government  |       | $                                            | 163,072    |                                        | $          | 122,070 |   |
| Other accounts receivable |       | 23,535                                       |       | 21,410                                      |       |
| Accounts receivable, net  |       | $                                            | 186,607    |                                        | $          | 143,480 |   |

 

As of September 30, 2010 andDecember 31, 2009, our accounts receivable included $105.8 million and $57.2million, respectively, of earned and unbilled accounts receivable, of which$12.1 million and $6.4 million, respectively, is earned and unbilled toIntegrated Survivability Technologies Limited and $93.7 million and $50.8million, respectively, is earned and unbilled to the U.S. government.  The earned and unbilled accounts receivableas of September 30, 2010 and December 31, 2009 primarily result fromnot-to-exceed undefinitized contracts whereby, although the products andservices have been delivered, we cannot fully bill until the contracts aredefinitized.  Other accounts receivableinclude amounts that relate to non-government entities and the sale of rawmaterials to suppliers.

 

**3.**    **Inventories**

 

Inventories consist of thefollowing (in thousands):

 
| ** **                | ** ** | **As of September 30,  2010** | ** ** | **As of December 31,  2009** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| Raw material and supplies |       | $                                            | 45,728     |                                        | $          | 57,026 |   |
| Work in process           |       | 23,508                                       |       | 16,099                                      |       |
| Finished goods            |       | 16,614                                       |       | 950                                         |       |
| Inventories               |       | $                                            | 85,850     |                                        | $          | 74,075 |   |

 

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**4.**    **Property and Equipment**

 

Property and equipmentconsist of the following (in thousands):

 
| ** **                                            | ** ** | **As of September 30,  2010** | ** ** | **As of December 31,  2009** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| Land                                                  |       | $                                            | 4,901      |                                        | $          | 4,419 |   |
| Buildings                                             |       | 16,020                                       |       | 13,246                                      |       |
| Leasehold improvements                                |       | 16,347                                       |       | 15,661                                      |       |
| Machinery and equipment; including tooling and  molds |       | 36,023                                       |       | 33,451                                      |       |
| Computer equipment and software                       |       | 17,238                                       |       | 15,297                                      |       |
| Furniture and fixtures                                |       | 3,773                                        |       | 3,668                                       |       |
| Demonstration and other vehicles                      |       | 4,535                                        |       | 2,657                                       |       |
| Manuals                                               |       | 705                                          |       | 705                                         |       |
|                                                  |       | 99,542                                       |       | 89,104                                      |       |
| Less: Accumulated depreciation                        |       | (43,720                                      | )          | (31,887                                     | )          |
|                                                  |       | 55,822                                       |       | 57,217                                      |       |
| Construction in progress                              |       | 4,992                                        |       | 1,701                                       |       |
| Property and equipment, net                           |       | $                                            | 60,814     |                                        | $          | 58,918 |   |

 

**5.**    **Income Taxes**

 

We provide for income taxesusing the liability method in accordance with FASB ASC Topic 740, “*Income Taxes*.”  Inaccordance with this guidance, the provision for taxes on income recognizes ourestimate of the effective tax rate expected to be applicable for the full year,adjusted for the impact of any discrete events, which are reported in theperiod in which they occur.  Eachquarter, we re-evaluate our estimated tax expense for the year and makeadjustments for changes in the estimated tax rate.  Additionally, we evaluate the realizabilityof our deferred tax assets on a quarterly basis.  Our evaluation considers all positive andnegative evidence and factors, such as the scheduled reversal of temporarydifferences, historical and projected future taxable income or losses, andprudent and feasible tax planning strategies.

 

The**incometax expense for the three and nine months ended September 30, 2010 wasbased on the estimated effective tax rates applicable for the fiscal yearending December 31, 2010, after considering items specifically related to theinterim period.  The income tax expensefor the three and nine months ended September 30, 2009 was based on theestimated effective tax rates applicable for the fiscal year endedDecember 31, 2009, after considering items specifically related to theinterim period.

 

Force Protection is subjectto United States federal, state, and local income taxes. * (Loss) incomebefore income tax expense*isas follows (in thousands):

 
| ** **                              | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                              | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                              | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| (Loss) income before income tax expense |       | $                                                  | (1,816     | )                                                 | $          | 3,307 |   | $ | 7,328 |   | $ | 15,174 |   |
|                                         |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |

 

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A reconciliation of thestatutory federal income tax (benefit) expense rate to the effective income taxexpense rate is as follows:

 
| ** **                                         | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                         | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income tax (benefit) expense at statutory rate     |       | (35.0                                              | )%         | 35.0                                              | %          | 35.0 | % | 35.0 | % |
| Increase (decrease) in tax rate resulting from:    |       |                                               |       |                                              |       |   |   |   |   |
| State income taxes, net of federal tax benefit     |       | (1.1                                               | )          | (9.9                                              | )          | 1.4 |   | (1.6 | ) |
| Research and development credit                    |       | 8.0                                                |       | (3.1                                              | )          | 2.0 |   | (1.9 | ) |
| Domestic Production Activities Deduction           |       | 27.5                                               |       | (15.5                                             | )          | 3.7 |   | (4.2 | ) |
| Interest expense related to uncertain tax benefits |       | 0.3                                                |       | —                                            |       | 0.2 |   | — |   |
| Nondeductible items                                |       | 3.0                                                |       | (3.8                                              | )          | 2.5 |   | — |   |
| Effective income tax expense rate                  |       | 2.7                                                | %          | 2.7                                               | %          | 44.8 | % | 27.3 | % |

 

The effective income taxrate is the provision for income tax expense as a percent of (loss) incomebefore income tax expense.  The effectiverate for the three months ended September 30, 2010 differs from the federalstatutory rate of 35% primarily due to the Domestic Production ActivitiesDeduction, the research and development credit,    nondeductible items and state incometaxes.  The effective rate for the ninemonths ended September 30, 2010 is higher than the federal statutory rate of35% primarily due to the Domestic Production Activities Deduction, the researchand development credit, nondeductible items and state income taxes.  On the December 31, 2009 federal income taxreturn, the Company changed its tax method of accounting for inventory andprepaid expenses.  These method changes resulted in the acceleration ofdeductions for tax purposes, which reduced the Domestic Production ActivitiesDeduction taken on the December 31, 2009 federal income tax return.  As a result of reconciling the December 31,2009 tax provision to the December 31, 2009 federal income tax return as filed,the Company recorded an increase to tax expense for the three and nine monthsended September 30, 2010.  Further, the actual research and developmentcredit was slightly lower on the December 31, 2009 federal income tax returnthan estimated in the prior year.  We incurredan expense in the three and nine months ended September 30, 2010 for thischange.

 

Tax years endedDecember 31, 2002 through December 31, 2009 remain open and aresubject to examination by the Internal Revenue Service.  However, we believe that we have appropriatesupport for the income tax positions taken and to be taken on our income taxreturns and that our income taxes receivable and accruals for tax liabilitiesare adequate for all open years based on an assessment of many factorsincluding past experience and interpretations of tax laws applied to the factsof each matter.  However, we do have a$1.1 million reserve, which includes approximately $53,000 of interest, forprior years’ income taxes as a result of applying the guidance in FASB ASCTopic 740, “*Income Taxes*.”  If recognized, the entire $1.1 million wouldfavorably impact the Company’s effective tax rate.  It is not expected that within the next12 months the effective tax rate will be impacted by the resolution ofsome or all of the matters by various taxing authorities.  We include interest and penalties related tofederal and state income taxes, if any, as a component of*Income tax expense* in the accompanyingunaudited condensed consolidated statements of operations.

 

**6.**    **(Loss) Earnings Per Common Share and Comprehensive(Loss) Income**

 

***(Loss) Earnings Per CommonShare***

 

The following table showsthe information used in the calculation of basic and diluted (loss) earningsper common share (in thousands, except per share amounts):

 

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| ** **                                                 | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                 | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                                 | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Numerator – Basic and diluted:**                    |       |                                               |       |                                              |       |   |   |   |   |
| Net (loss) income                                          |       | $                                                  | (1,864     | )                                                 | $          | 3,219 |   | $ | 4,049 |   | $ | 11,036 |   |
| **Denominator:**                                           |       |                                               |       |                                              |       |   |   |   |   |
| Weighted average common shares outstanding – basic    |       | 68,798,918                                         |       | 68,435,550                                        |       | 68,752,757 |   | 68,422,738 |   |
| Add:     Stock options            |       | —                                             |       | 74,058                                            |       | 115,338 |   | 130,117 |   |
| Add:     Stock grants             |       | —                                             |       | 353,813                                           |       | 812,844 |   | 377,331 |   |
| Weighted average common shares outstanding –  diluted |       | 68,798,918                                         |       | 68,863,421                                        |       | 69,680,939 |   | 68,930,186 |   |
| **Basic (loss) earnings per common  share:**               |       |                                               |       |                                              |       |   |   |   |   |
| Net (loss) income – basic                             |       | $                                                  | (0.03      | )                                                 | $          | 0.05 |   | $ | 0.06 |   | $ | 0.16 |   |
| **Diluted (loss) earnings per  common share:**             | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss) income – diluted                           |       | $                                                  | (0.03      | )                                                 | $          | 0.05 |   | $ | 0.06 |   | $ | 0.16 |   |

 

The calculation of (loss)earnings per common share is based on the weighted-average number of our commonshares outstanding during the applicable period.  The calculation for diluted (loss) earningsper common share recognizes the effect of all dilutive potential common sharesthat were outstanding during the respective periods, unless their impact wouldbe anti-dilutive.  We use the treasury stock method to calculate thedilutive effect of stock options and other common stock equivalents(potentially dilutive shares).  Thesepotentially dilutive shares include stock options and unvested restricted stockgrants.  We did not include stock optionsto purchase 75,582 and 65,169 shares of common stock for the three and ninemonths ended September 30, 2010, respectively, and zero and 37,960 shares ofcommon stock for the three and nine months ended September 30, 2009,respectively, in our computation of diluted (loss) earnings per share, as theeffect of including such options would be anti-dilutive.  In addition, we did not include 738,711unvested restricted stock grants in the computation of the diluted loss pershare for the three months ended September 30, 2010 since inclusion would beanti-dilutive in our computation of diluted (loss) earnings per share becausewe recorded a net loss for this period.

 

***Comprehensive (Loss)Income***

 

Our comprehensive (loss)income was ($1.9) million and $3.9 million for the three and nine months endedSeptember 30, 2010 and $3.2 million and $10.9 million for the three and ninemonths ended September 30, 2009, respectively. The components of our comprehensive income are net income and foreigncurrency translation adjustments of zero and $0.1 million net loss for thethree and nine months ended September 30, 2010, respectively, and zero and $0.2million net loss for the three and nine months ended September 30, 2009.

 

**7.**    **Commitments and Contingencies**

 

***Financing Commitments–Credit Facility***

 

As of December 31, 2009 andSeptember 30, 2010, we had a $40 million revolving credit line with Wells FargoBank, National Association, which expires April 30, 2012.  Furthermore, wecan designate up to $5.0 million for letters of credit against the $40 millionline of credit.  There were no borrowingsoutstanding under the facility as of December 31, 2009 or September 30,2010.  However, on July 23, 2010, we obtained a letter of credit in theamount $3.3 million Australian dollars for the performance of our obligationsunder a contract for the PMV-L vehicle program. This letter of credit has lowered the availability under our line ofcredit to approximately $36.8 million as of September 30, 2010.  Borrowings under the line of credit bear afloating interest rate per annum on any principle borrowings applicable to theLIBOR rate plus a spread.  The bank’s obligation to make loans under theline of credit is subject to, among other things, our compliance with variouscovenants to include a maximum leverage ratio. As of December 31, 2009 andSeptember 30, 2010, we were in compliance with all of our line of creditcovenants.

 

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***Legal Proceedings***

 

*ShareholderClass Action and Derivative Actions*

 

On March 10, 2008, thefirst of ten related class action lawsuits was filed against us and certain ofour former and current directors and officers in the United States DistrictCourt for the District of South Carolina, Charleston Division, on behalf of apurported class of investors who purchased or otherwise acquired our stockduring the period between August 14, 2006 and February 29, 2008.  The complaints seek class certification, andthe allegations include, but are not limited to, allegations that thedefendants violated the Securities Exchange Act of 1934 and made false ormisleading public statements and/or omissions concerning our business, internalcontrols, and financial results.  Theindividual class action lawsuits were consolidated on June 10, 2008, underthe caption *In Re Force Protection, Inc. SecuritiesLitigation*, Action No. 2:08-cv-845-CWH.  An agreement to settle the consolidatedshareholder securities class action lawsuit has been reached, which waspreliminarily approved by the Court on October 5, 2010.  The settlement amount is $24.0 million, amajority of which will be covered by insurance upon final approval of the classand derivative action settlements.  Ahearing to determine the final approval of the class action settlement is setfor January 25, 2011.

 

Between March 27, 2008and September 24, 2010, a series of shareholder derivative actions werefiled in both state and federal courts against certain of our former andcurrent directors and officers alleging that the individual defendants breachedfiduciary duties, abused control, engaged in gross mismanagement and wasted corporateassets and were unjustly enriched. Recovery is sought for the benefit of the Company, which has been nameda nominal defendant in each derivative action. The state court actions pending in South Carolina were consolidated on May 18,2009.  A hearing on various proceduralmotions is set for December 7, 2010.

 

On September 24, 2010,a related shareholder derivative action captioned *NicolaSaulle v. Frank Kavanaugh, et al.,* Case No. 10 OC 00442 1B wasfiled in state court in Nevada.

 

Four derivative lawsuitspending in the United States District Court for the District of South Carolina,Charleston Division, were consolidated on March 31,2009, under the caption *In Re Force Protection, Inc. Derivative Litigation*, Action No. 2:08-cv-01907-CWH.  An agreement to settle the shareholderderivative lawsuit pending in federal court (but not the state courtproceeding) has been reached, which was preliminarily approved by the court on October 5,2010.  The settlement provides that theCompany will adopt certain corporate governance practices, receive a payment of$2.25 million from insurance, and pay plaintiffs’ attorney’s fees and expensesin an amount not to exceed $2.3 million. A hearing to determine the final approval of the federal derivativeaction settlement is set for December 13, 2010.

 

Neither the Company nor anyof its present and former directors and officers has admitted any wrongdoing orliability in connection with these settlements. Additionally, each settlement provides that the parties have reached amutually agreeable resolution of the case to avoid protracted and expensivelitigation, including the outcome and risks associated with proceeding.  As of September 30, 2010, we recorded a$20.1 million insurance receivable within *Other current assets*in the accompanying unaudited condensed consolidated balance sheet, an $8.5million charge to *General and administrative expenses*inthe accompanying unaudited condensed consolidated statement of operationsrelated to the class and derivative action settlements, and we recorded a $28.6million liability within *Other current liabilities*in the accompanying unaudited condensed consolidated balance sheet as of September 30,2010.

 

*OtherDisputes*

 

We have received a total of78 complaints over the last three years from current and former employees filedwith the United States Equal Employment Opportunity Commission alleging, amongother things, race and/or gender discrimination.  We have responded to the complaints as suchresponses have become due, and have investigated the allegations.

 

On June 26, 2009, atemporary independent contractor whose services we terminated in 2007 filed acomplaint against the Company in the United States District Court for theDistrict of South Carolina, Charleston Division, as Civil Action No. 2:09cv1708-DCN-BM,which alleges a violation under the employee protection provisions ofSection 806 of the Corporate and Criminal Fraud Accountability Act of2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1514A.  The former independent contractor allegesthat we terminated his engagement in

 

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retaliation for hisallegation of certain corporate governance, government contracting, accountingand other irregularities.  On March 12,2010, we filed motions to dismiss certain claims in the plaintiff’s complaint.

 

In September 2010, wesubmitted a voluntary disclosure to the Directorateof Defense Trade Controls (DDTC) in regard to the inadvertent import ofa vehicle into the U.S. without proper DDTC authorization.  Simultaneous with this submission, werequested authorization to allow the vehicle to remain in the U.S. and bedisplayed at various locations, which the DDTC granted.  Our submission to the DDTC also proposedself-corrective actions, which we are implementing.  We have not received a response to our proposalfrom the DDTC or notice of any fines, penalties or administrative actions.

 

Although we intend to defendourselves in connection with the foregoing legal proceedings and claims, therecan be no assurance that we will ultimately prevail in any of these matters,and any settlement or adverse judgment may have a material adverse effect onour business or financial position, results of operations, or cash flows.  We are also a party to other litigation whichwe consider routine and incidental to our business.  We may be involved from time to time in otherlitigation that could have a material effect on our operations orfinances.  Other than the litigationdescribed above, we are not aware of any pending or threatened litigationagainst us that could have a material adverse effect on our business orfinancial position, results of operations or cash flows.

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations (MD&A) isdesigned to provide information that is supplemental to, and should be readtogether with, our unaudited condensed consolidated financial statements andthe accompanying notes included in this Quarterly Report onForm 10-Q.  Information in this Item2 is intended to assist the reader in obtaining an understanding of ourunaudited condensed consolidated financial statements, the changes in certainkey items in those financial statements from period to period, the primaryfactors that accounted for those changes, and any known trends or uncertaintiesthat we are aware of that may have a material effect on our future performance,as well as how certain accounting principles affect our unaudited condensedconsolidated financial statements. MD&A includes the following sections:

 

·                  Overview

 

·                  Outlook

 

·                  Results of Operations—ananalysis of our consolidated results of operations, for the three and ninemonths presented in our unaudited condensed consolidated financial statements

 

·                  Liquidity and CapitalResources—an analysis of the effect of our operating, financing and investingactivities on our liquidity and capital resources

 

·                  Off- Balance Sheet Arrangements—adiscussion of such commitments and arrangements

 

·                  Contractual Obligations—asummary of our aggregate contractual obligations

 

·                  Critical Accounting Policiesand Estimates—a discussion of accounting policies that require significantjudgments and estimates

 

·                  New AccountingPronouncements—a summary and discussion of our plans for the adoption of newaccounting standards relevant to us

 

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report onForm 10-Q contains both historical and forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended(Securities Act), and Section 21E of the Securities Exchange Act of 1934,as amended (Exchange Act).  All statements other than statements ofhistorical fact included in this Quarterly Report on Form 10-Q thataddress activities, events or developments that we expect, believe oranticipate will or may occur in the future are forward-looking statementsincluding, in particular, the statements about our plans, objectives,strategies and prospects regarding, among other things, our financial position,results of operations, cash flows and business. We have identified some of these forward-looking statements with wordslike “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,”“anticipate,” “outlook,” “estimate” or “continue” and other words and terms ofsimilar meaning.  These forward-lookingstatements include, among other things:

 

·                  Statements regarding thegrowth of the U.S. and world market for blast- and ballistic-protected vehiclesand our survivability products, services and solutions,

 

·                  Statements regarding theU.S. military’s plans or intentions, including operations in Iraq and inAfghanistan,

 

·                  Information regarding thenumber of various types of MRAP and other armored vehicles that may bepurchased by the U.S. Marine Corps, the U.S. Army and other U.S. and foreigncustomers under various programs,

 

·                  Statements with respect toour expectations regarding our ability to obtain materials, components andsupplies necessary to manufacture our vehicles and our ability to improve costefficiencies,

 

·                  Statements regarding ourability to expand our current business, including the effect of our research

 

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and development andintroduction of new products,

 

·                  Statements regarding anychanges in our cost of sales, our general and administrative expenses, ouroperating results or our research and development expenses as a percentage ofnet sales,

 

·                  Statements regarding ouranticipated cash needs,

 

·                  Statements regarding ourbusiness strategy, including growing balanced diverse revenue and earnings,

 

·                  Statements regarding therevenues that may be derived from, and the quantities of vehicles, products andservices that may be purchased or ordered pursuant to, existing or possiblefuture contracts or orders by various customers, including statements regardingthe estimated value of those orders and contracts and statements about theamount of vehicles in our backlog,

 

·                  Statements regarding theeffects of rebalancing our workforce and manufacturing capacities,

 

·                  Statements regarding thebenefits that may be realized from our joint ventures, teaming arrangements andany new ventures or business developed pursuant to them and our ability to growthrough meaningful acquisitions,

 

·                  Statements regarding theeffect of our income tax positions on our effective tax rate, and

 

·                  Statements regarding finalapproval of the federal class and derivative actions.

 

References herein to “ForceProtection,” the “Company,” “we,” “our” or “us” refer to Force Protection, Inc.and its subsidiaries unless otherwise stated or indicated by context.

 

**Overview**

 

Force Protection, Inc.provides survivability solutions to support the armed forces of the UnitedStates and its allies.  We design,manufacture, test, deliver and support our blast- and ballistic-protectedproducts to increase survivability for the users of our products.  Our specialty vehicles, which we believe areat the forefront of blast- and ballistic-protected technology, are designed toprotect their occupants from landmines, hostile fire, and improvised explosivedevices (IEDs).  We are a key provider ofthe U.S. military’s Mine Resistant Ambush Protected (MRAP) vehicle program andhave sold and delivered over 3,000 vehicles under this program.  We also provide our Cougar and Buffalomine-protected vehicles to several foreign customers, including the U.K.Ministry of Defence (U.K. MoD) which has purchased three variants of our Cougarvehicle.  Complementing these efforts, weare developing and marketing new vehicle programs, including the Ocelot andJoint All-Terrain Modular Mobility Asset (JAMMA), that provide increasedmodularity, speed and mobility.  Acrossall vehicle programs we have sold approximately 4,600 vehicles since 2005.  Supporting our vehicle design, developmentand production initiatives, we develop, manufacture, test, deliver and supportproducts and services aimed at further enhancing the survivability of our usersagainst additional threats.  Capitalizingon our strengths in survivability solutions, we are focused on developingadditional products to protect against rocket-propelled grenades and under bodyarmor kits to mitigate blast effects on military vehicles.  We also provide long-term life cycle supportservices for our vehicles that involve development of technical data packages,supply of spares, field and depot maintenance activities, assignment ofhighly-skilled field service representatives, and advanced off-road driver andmaintenance training programs.  Ourservices are based on establishing and maintaining long-term relationships withthe U.S. government and foreign military users.

 

Our business is heavilyinfluenced by the needs of the U.S. military for blast- and ballistic-protectedwheeled vehicles.  The U.S. Department ofDefense is our largest customer.  For thepast several years, substantially all of our net sales have been derived fromthe U.S. Department of Defense, including Foreign Military Sales through theU.S. government.  We attempt to align ourworkforce to satisfy our business requirements.

 

We are headquartered inSummerville, South Carolina and have leased manufacturing facilities in Ladson,South Carolina.  We have office space inSterling Heights, Michigan; North Charleston, South Carolina; Arlington,Virginia; Bristol, United Kingdom; and Leamington Spa, United Kingdom.  We conduct our blast range, research anddevelopment activities and customer training requirements at properties locatedin Edgefield, South Carolina;

 

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Summerville, South Carolina;and Roxboro, North Carolina.  We alsohave a vehicle support facility in Kuwait and provide military operationssupport in Afghanistan.

 

**Outlook**

 

The global war on terrorism,especially in Iraq and Afghanistan, has confirmed that IEDs, landmines,explosively-formed projectiles and rocket-propelled grenades pose a significantthreat to coalition military personnel and civilians.  We believe the world market for blast- andballistic-protected military vehicles and other survivability solutions willremain at high levels in the short-term. The 30,000 troop surge of forces to Afghanistan is expected to take mostof 2010 to achieve and additional, or modified, MRAPs from original equipmentmanufacturers (OEMs) have been required to support operations in this difficultterrain.  Landmines and IEDs are beingused by terrorists and insurgent groups worldwide, and extensively inAfghanistan, because of their highly effective nature and relatively lowcost.  The extent of the long-termpresence of U.S. forces in Afghanistan is uncertain.  Consequently, U.S. and international militarydepartments are in the process of determining long-term roles for MRAPs.  The future requirements for long-term lifecycle logistics plans, as well as an important effort to reset and recapitalizevehicles that come out of theater, are also being determined.  MRAPs can be placed into permanent militaryorganizations for convoy security, route clearance, explosive ordnance disposaland casualty evacuation, or be placed into pre-positioned storage roles forregional response, reassigned as home station training vehicles, or sold toforeign military customers.

 

*Our fiscal 2010 outlook is basedon the following market assumptions and expectations:*

 

·                  A reduction of combat forcesand our vehicles in Iraq, which has significantly reduced the operational tempoplaced on our fleet*,*as well asthe requirement for our field service representatives resourced to supportunits in that theater,

 

·                  Conversely, there is growth of military forces, ourvehicles and all MRAPs in Afghanistan, which is necessitating changes to ourvehicles and is increasing sustainment/maintenance requirements.  Our currentcustomers are developing and executing modernization and sustainment plans forour fielded fleet of vehicles and we will have to compete for the spares andsustainment support business for these vehicles,

 

·                  Uncertainty in defense spending, due to the currentdefense strategy, as well as the dynamic macroeconomic and geopoliticalconditions,

 

·                  Challenges with theexpansion of our customers, products and services both domestically andinternationally.  We will continue to tryto capture contract awards for our products and services in a volatilemarketplace,

 

·                  Establishing long-termprograms to include upgrades, remanufacture, and sustainment for our fleet ofvehicles, and then expanding this capability to sustain all MRAPs universally,

 

·                  Developing new products andservices to bring to market, and

 

·                  Rationalizing our coststructure to match our sales.

 

*Strategic Outlook*

 

Our business strategy isfocused on increasing shareholder value by providing products and services thatare relevant, responsive, innovative, high-quality and affordable.  We believe the global need for blast- andballistic- protected military vehicles and other survivability solutions willremain strong at least through 2011.  TheU.S. and foreign military departments are determining the current and futureroles for MRAP vehicles.  We expect a large number of our currentlydeployed vehicles will remain in service or be pre-positioned for rapiddeployment.  These vehicles will likely require an overhaul andmodification to remain in optimal combat readiness.  We plan to leverageour manufacturing skills and field services to support our customers inmaintaining readiness for these highly valued assets.  Although much ofthis work will involve large depot facilities, the magnitude of work couldexceed our capacity and require strategic partnerships to complete work onschedule.

 

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With our family of vehicles, we believe that weprovide our customers with a wide variety of solutions with multiplecapabilities for various types of missions.  Over the past couple ofyears, the general trend for new programs has progressed toward lighter-weightvehicles with levels of survivability similar to our other vehicles.  We view the Ocelot as an optimal solution forthe lighter vehicle market.  We achieved a significant milestone with theOcelot in September 2010 with the announcement by the U.K. MoD that ForceProtection Europe Limited was selected as the preferred bidder in the LPPVcompetition with deliveries expected to begin in 2011.  The Ocelot has also been selected as one ofthree funded vehicles to continue in the competitive prototyping in theManufactured and Supported in Australia (MSA) option for the Land 121 program.

 

We intend to maintain andexpand our current business as a leading supplier of survivability solutions,including protected vehicles, total life cycle support and other services, tothe U.S. Department of Defense, other U.S. government agencies, foreigngovernments, and domestic and international commercial customers.  Our strategy is focused on growing balanceddiverse revenue and earnings through organic growth, cost containment, andselected investments, partnerships and acquisitions, which will enable us togrow the Company.  Specific components ofthe strategy include the following:

 

·                  Building on our basebusiness to enable future success, including improving performance on contractsand improving our cost structure,

 

·                  Capitalizing on andextending our current business, including growing sales organically byinvesting in research and development and introducing new products within ourcore capabilities of blast- and ballistic-protection,

 

·                  Building on our corecapabilities and continuing to ensure a leadership position by deliveringinnovative survivability solutions to market, including investing in newtechnologies, and

 

·                  Growing profitably throughmeaningful acquisitions, partnerships and investments to engage in a broaderrange of products, customers and markets.

 

Asdiscussed in Item 4,*Controls and Procedures*, of thisQuarterly Report on Form 10-Q, webelieve that effective disclosure controls and procedures (as defined inRule 13a-15(e) and Rule 15d-15(f) under the Exchange Act) are in place as of September 30,2010.  We will continue to devote ourresources, in an amount we believe to be appropriate, to maintain effectiveinternal controls over our financial reporting and disclosures.

 

*Recent Modernization and Sparesand Sustainment Awards*

 

On August 2, 2010, wewere awarded a contract modification under our MRAP contract for continuingfield service support work in Afghanistan, Kuwait and the continental UnitedStates.  The contract modification has afirm, fixed price valued at $19.9 million.

 

On August 19, 2010, wewere awarded a contract modification under our MRAP contract for continuingfield service support work and Standard Consumable Kits to support Operationsat Vehicle Support Facility — Afghanistan and conduct general maintenance.  The contract modification has a firm, fixedprice valued at $14.5 million.

 

On August 23, 2010, wewere awarded a contract modification under our MRAP contract for seatsurvivability upgrade kits for 1,946 MRAP Cougar vehicles.  The modification is subject to definitizationand is valued at approximately $64.1 million. This work will be performed primarily in Afghanistan with additionalwork in Kuwait and home stations in the United States.

 

**Results ofOperations**

 

The following discussion andanalysis is based on our unaudited condensed consolidated statements ofoperations, which reflect our results of operations for the three and ninemonths ended September 30, 2010 and 2009 as prepared in accordance withgenerally accepted accounting principles in the United States of America(GAAP).

 

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***Comparison of Results of Operations for the Three and Nine Months EndedSeptember 30, 2010 and 2009***

 

The following table presentsour results of operations for the three and nine months ended September 30,2010 and 2009.

 
| ** **                              | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**                 | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                               |       | $                                                                          | 176,265    |                                                                      | $          | 316,164 |   | $ | 448,251 |   | $ | 688,014 |   |
| Cost of sales                           |       | 142,690                                                                    |       | 289,628                                                                   |       | 357,605 |   | 598,863 |   |
| Gross profit                            |       | 33,575                                                                     |       | 26,536                                                                    |       | 90,646 |   | 89,151 |   |
| General and administrative expenses     |       | 27,868                                                                     |       | 19,196                                                                    |       | 65,732 |   | 60,219 |   |
| Research and development expenses       |       | 7,314                                                                      |       | 4,239                                                                     |       | 17,445 |   | 13,736 |   |
| Operating (loss) income                 |       | (1,607                                                                     | )          | 3,101                                                                     |       | 7,469 |   | 15,196 |   |
| Other (expense) income, net             |       | (187                                                                       | )          | 252                                                                       |       | 75 |   | 57 |   |
| Interest expense, net                   |       | (22                                                                        | )          | (46                                                                       | )          | (216 | ) | (79 | ) |
| (Loss) income before income tax expense |       | (1,816                                                                     | )          | 3,307                                                                     |       | 7,328 |   | 15,174 |   |
| Income tax expense                      |       | (48                                                                        | )          | (88                                                                       | )          | (3,279 | ) | (4,138 | ) |
| Net (loss) income                       |       | $                                                                          | (1,864     | )                                                                         | $          | 3,219 |   | $ | 4,049 |   | $ | 11,036 |   |

 

*Units sold*

 

The following table presentsour vehicle unit sales for the three and nine months ended September 30,2010 and 2009.

 
| ** **                  | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Units Sold**         | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Buffalo                     |       | 17                                                                         |       | 51                                                                        |       | 60 |   | 80 |   |
| Cougar MRAP (Competitive)   |       | —                                                                     |       | 4                                                                         |       | — |   | 9 |   |
| Mastiff                     |       | 27                                                                         |       | —                                                                    |       | 87 |   | 24 |   |
| Ridgback                    |       | —                                                                     |       | —                                                                    |       | — |   | 83 |   |
| Wolfhound                   |       | —                                                                     |       | 52                                                                        |       | 24 |   | 56 |   |
| Cougar (all other variants) |       | 30                                                                         |       | 3                                                                         |       | 34 |   | 31 |   |
| Cheetah                     |       | —                                                                     |       | —                                                                    |       | — |   | 5 |   |
| Ocelot                      |       | —                                                                     |       | —                                                                    |       | 2 |   | — |   |
| Total                       |       | 74                                                                         |       | 110                                                                       |       | 207 |   | 288 |   |

 

*Net sales*

 

The decrease in net salesfrom the three and nine months ended September 30, 2010 to the comparableperiods for 2009 was mostly attributable to a decrease in vehicle sales volumeand  a decrease in spares and sustainmentsales, including field service representatives, training, Iraqi LightArmored Vehicle (ILAV) subcontractor revenues and technical publications;partially offset by an increase in sales resulting from modernization efforts,which include the supply and installation of kits for our vehicles.  The spares and sustainment sales decreasedfrom the three and nine months ended September 30, 2010 to the comparableperiods for 2009 due to the current demand slowing for spares as large suppliesof initial spares procurement with the initial vehicle deliveries are currentlybeing consumed.  Additionally, the modernization of Cougar independentsuspension system kits has decreased the demand for straight axle spares andother components, which have been a large part of the spares revenue in thepast.

 

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The sales mix of vehicles,modernization efforts and spares and sustainment in the comparative periods areset forth in the following table:

 
| ** **                  | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**     | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Buffalo                     |       | $                                                                          | 16,870     |                                                                      | $          | 51,252 |   | $ | 61,715 |   | $ | 80,682 |   |
| Cougar MRAP (Competitive)   |       | —                                                                     |       | 2,107                                                                     |       | — |   | 6,136 |   |
| Mastiff                     |       | 14,139                                                                     |       | 920                                                                       |       | 47,608 |   | 12,528 |   |
| Ridgback                    |       | —                                                                     |       | 340                                                                       |       | — |   | 34,829 |   |
| Wolfhound                   |       | —                                                                     |       | 26,192                                                                    |       | 11,070 |   | 29,018 |   |
| Cougar (all other variants) |       | 21,643                                                                     |       | 5,352                                                                     |       | 24,542 |   | 26,380 |   |
| Cheetah                     |       | —                                                                     |       | —                                                                    |       | — |   | 3,362 |   |
| Ocelot                      |       | —                                                                     |       | —                                                                    |       | 1,462 |   | — |   |
| Modernization               |       | 81,765                                                                     |       | 80,614                                                                    |       | 161,464 |   | 107,888 |   |
| Spares and sustainment      |       | 41,848                                                                     |       | 149,387                                                                   |       | 140,390 |   | 387,191 |   |
| Total                       |       | $                                                                          | 176,265    |                                                                      | $          | 316,164 |   | $ | 448,251 |   | $ | 688,014 |   |

 

*Cost ofsales and Gross profit*

 
| ** **                                | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**                   | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cost of sales                             |       | $                                                                          | 142,690    |                                                                      | $          | 289,628 |   | $ | 357,605 |   | $ | 598,863 |   |
| Gross profit                              |       | $                                                                          | 33,575     |                                                                      | $          | 26,536 |   | $ | 90,646 |   | $ | 89,151 |   |
| Gross profit as a percentage of net sales |       | 19.0                                                                       | %          | 8.4                                                                       | %          | 20.2 | % | 13.0 | % |

 

The gross profit percentageincreased by 10.6 and 7.2 percentage points for the three and nine months endedSeptember 30, 2010 over the comparative 2009 periods.  The three and nine month increases in 2010 ascompared to 2009 were primarily due to the lower margins during the three andnine months ended September 30, 2009, which was primarily due to the $19.3million of Cheetah expenses to reduce these vehicles to their net realizablevalue and increased severance costs related to the 2009 cost reductioninitiative.  In addition, the three andnine month increases in 2010 were due to the mix of sales with higher marginsin the respective 2010 periods as a larger portion of total sales in 2010 hadslightly higher profit contracts.

 

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*Generaland administrative expenses*

* *
| ** **                          | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**             | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| General and administrative expenses |       | $                                                                          | 27,868     |                                                                      | $          | 19,196 |   | $ | 65,732 |   | $ | 60,219 |   |
| As a percentage of net sales        |       | 15.8                                                                       | %          | 6.1                                                                       | %          | 14.7 | % | 8.8 | % |
|                                     |            |                                                                            |            |                                                                           |            |  |  |  |  |  |  |  |  |

 

General and administrativeexpenses increased $8.7 million and $5.5 million for the three and nine monthsended September 30, 2010, from the comparable 2009 periods.  The $8.7 million increase for the threemonths ended September 30, 2010 from the comparative 2009 period isprimarily due to the $8.5 million charge for the estimated settlement cost ofthe federal shareholder class and derivative actions.  See Note 7,***Commitments andContingencies*, in the accompanying unaudited condensed consolidatedfinancial statements.  The $5.5 millionincrease for the nine months ended September 30, 2010 from the comparative2009 period is primarily due to the $8.5 million settlement charge incurred inthe third quarter of 2010 as well as increased costs for our Europeanoperations ($2.2 million), business development ($2.0 million), strategy ($1.9million) and depreciation ($1.5 million). These costs were partially offset by the $3.2 million of 2006 re-auditcosts incurred during the first quarter of 2009, $0.7 million impairment forcertain custom machines incurred during the second quarter of 2009 and lowerlegal fees ($2.3 million), lower audit fees ($1.9 million) and lower consultingfees ($0.8 million) for the nine months ended September 30, 2010 ascompared to September 30, 2009.  Allother general and administrative expenses, net, decreased $1.7 million for thenine months ended September 30, 2010 as compared to 2009.

 

*Researchand development expenses*

 
| ** **                        | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**           | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development expenses |       | $                                                                          | 7,314      |                                                                      | $          | 4,239 |   | $ | 17,445 |   | $ | 13,736 |   |
| As a percentage of net sales      |       | 4.1                                                                        | %          | 1.3                                                                       | %          | 3.9 | % | 2.0 | % |
|                                   |            |                                                                            |            |                                                                           |            |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses increased by $3.1 million and $3.7 million for the three and ninemonths ended September 30, 2010, over the comparable 2009 periods.  Total expenses incurred for the three andnine months ended September 30, 2010 were primarily for the Ocelot, JAMMAand other vehicle development programs, survivability enhancements forcurrently fielded vehicles and armor development activities.  Total expenses incurred for the three andnine months ended September 30, 2009 were primarily for the Cheetah,Ocelot and other prototypes.

 

*Other(expense) income, net*

* *
| ** **                   | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**      | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Other (expense) income, net  |       | $                                                                          | (187       | )                                                                         | $          | 252 |   | $ | 75 |   | $ | 57 |   |
| As a percentage of net sales |       | (0.1                                                                       | )%         | 0.1                                                                       | %          | 0.0 | % | 0.0 | % |
|                              |            |                                                                            |            |                                                                           |            |  |  |  |  |  |  |  |  |

 

Other income, net decreasedby $0.4 million for the three months ended September 30, 2010, as comparedto the same period for 2009, primarily due to the $0.2 million loss on ourjoint venture, Integrated Survivability Technologies Limited (IST), forthe three months ended September 30, 2010 compared to a $0.2 million gainfor the same period in 2009.  Other(expense) income, net was relatively flat for the nine months ended September 30,2010, as compared to the 2009 period.

 

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*Interestexpense, net*

* *
| ** **                   | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**      | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest expense, net        |       | $                                                                          | (22        | )                                                                         | $          | (46 | ) | $ | (216 | ) | $ | (79 | ) |
| As a percentage of net sales |       | 0.0                                                                        | %          | 0.0                                                                       | %          | 0.0 | % | 0.0 | % |
|                              |            |                                                                            |            |                                                                           |            |  |  |  |  |  |  |  |  |

 

 

Interest expense, net wasrelatively flat for the three and nine months ended September 30, 2010, ascompared to the same periods for 2009.

 

*Income taxexpense*

* *
| ** **                   | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**      | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income tax expense           |       | $                                                                          | 48         |                                                                      | $          | 88 |   | $ | 3,279 |   | $ | 4,138 |   |
| As a percentage of net sales |       | 0.0                                                                        | %          | 0.0                                                                       | %          | 0.7 | % | 0.6 | % |
|                              |            |                                                                            |            |                                                                           |            |  |  |  |  |  |  |  |  |

 

Income tax expense wasrelatively flat for the three months ended September 30, 2010, from thecomparable 2009 period, and decreased $0.9 million for the nine months ended September 30,2010, from the comparable 2009 period, primarily because of lower profitsresulting from reduced sales volumes, partially offset with a higher effectiveincome tax rate for the nine months ended September 30, 2010 as comparedto the nine months ended September 30, 2009.  The effective income tax rates for the threeand nine months ended September 30, 2010 were approximately 3% and 45%,compared to the effective income tax rates of approximately 3% and 27% for thecomparable 2009 periods.  See Note 5, *Income Taxes*, in the accompanyingunaudited condensed consolidated financial statements.

 

*Net (loss)income*

* *
| ** **                                                            | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net (loss) income                                                     |       | $                                                                          | (1,864     | )                                                                         | $          | 3,219 |   | $ | 4,049 |   | $ | 11,036 |   |
| Diluted (loss) earnings per share                                     |       | $                                                                          | (0.03      | )                                                                         | $          | 0.05 |   | $ | 0.06 |   | $ | 0.16 |   |

 

Net (loss) income for thethree and nine months ended September 30, 2010 decreased $5.1 million and$7.0 million from the comparable 2009 periods due primarily to a decrease inprofits resulting from decreased sales volume as well as an $8.5 million chargefor the estimated settlement cost of the federal shareholder class andderivative actions.  See Note 7,***Commitmentsand Contingencies*, in the accompanying unaudited condensedconsolidated financial statements.

 

*Backlog*

 

The following table setsforth the number of vehicles included in our backlog as of September 30,2010 and 2009.  The backlog shown in thefollowing table is “funded” backlog, meaning that it reflects vehicles forwhich we have received orders and for which funding has been appropriated andauthorized for expenditure by the applicable customer.  We cannot assure that we will deliver or sellall of the vehicles included in our backlog. See Part I, Item 1A, Risk Factors, included in our AnnualReport on Form 10-K for the year ended December 31, 2009.

 

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| ** **                  | ** ** | **Vehicle Funded Backlog** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **September 30,**               | ** ** |
| ** **                  | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| Buffalo                     |       | 61                                   |       | 99 |   |
| Ridgback                    |       | 20                                   |       | — |   |
| Wolfhound                   |       | 4                                    |       | 42 |   |
| Cougar (all other variants) |       | 6                                    |       | 10 |   |
| Ocelot                      |       | 2                                    |       | — |   |
| Total                       |       | 93                                   |       | 151 |   |

 

**Liquidityand Capital Resources**

 

Our liquidity and availablecapital resources are impacted by operating, financing and investingactivities.  Our principal sources of liquidity are cash on hand and cashfrom operations, primarily from contracts with the U.S. government.

 

*Sourcesand Uses of Cash*

 

During the past severalyears, our cash requirements have been met primarily through cash flowsprovided by operations, and our funds have been used primarily to fund workingcapital requirements and make capital expenditures.  The following chart shows the cash flowsprovided by or used in operating, investing and financing activities for thenine months ended September 30, 2010 and 2009:

 
| ** **                                           | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**                              | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** |
| Net cash (used in) provided by operating  activities |       | $                                                                         | (27,889    | ) | $ | 21,924 |   |
| Net cash used in investing activities                |       | (13,935                                                                   | )          | (20,885 | ) |
| Net cash provided by (used in) financing  activities |       | 28                                                                        |       | (91 | ) |
| Effect of exchange rate changes on cash              |       | (20                                                                       | )          | — |   |
| (Decrease) increase in cash and cash equivalents     |       | $                                                                         | (41,816    | ) | $ | 948 |   |

 

As of September 30,2010, we had $105.4 million of cash and cash equivalents, a decrease from$147.3 million as of December 31, 2009, and a decrease from $111.9 millionat September 30, 2009.

 

*Cash Flowsfrom Operating Activities*

 

Cash flows from operatingactivities decreased by $49.8 million during the first nine months of 2010,compared with the first nine months of 2009. The decrease resulted from a reduction in net income and unfavorable netchanges in operating assets and liabilities during the first nine months of2010, compared to the same period for 2009.

 

Below are the significantchanges in operating assets and liabilities for the first nine months of 2010:

 

Increases to *Cash Flows from Operating Activities*:

 

·                  an increase inaccounts payable of $5.9 million primarily resulting from increased obligationsrelated to our modernization contracts and the timing of our purchases andrelated payments.

 

Decreases to *Cash Flows from Operating Activities*:

 

·                  an increase in accountsreceivable of $43.1 million primarily resulting from an increase in the earnedand unbilled accounts receivable balance due to increased sales undernot-to-exceed undefinitized contracts, whereby we cannot fully bill until thecontracts are definitized although the products have been delivered, 

 

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partially offset by lowernet sales during the three months ended September 30, 2010 compared to thethree months ended December 31, 2009,

 

·                  an increase in inventoriesof $11.7 million primarily resulting from an increase in finished goods as of September 30,2010 due to the timing of customer acceptance,

 

·                  a decrease in otherliabilities of $6.9 million primarily due to a decrease in federal and statetaxes payable and compensation-related liabilities as of September 30,2010, and

 

·                  a decrease in due to U.S.government of $3.5 million primarily due to decreased definitization reserverequirements for spares, partially offset by an increased reserve for the U.K.Mastiffs, Buffalos, Ridgbacks and Wolfhounds as of September 30, 2010compared to December 31, 2009.

 

*Cash Flowsfrom Investing Activities*

 

Cash used in investingactivities decreased by $7.0 million during the first nine months of 2010compared with the first nine months of 2009 primarily due to the $10.0 millioninvestment in marketable securities consisting of held-to-maturity (180-day)treasury bills and the $2.1 million investment in IST, our joint venture withNP Aerospace, which both occurred in 2009. These decreases were partially offset by the $3.6 million increase incapital expenditures and the $1.7 million purchase of JAMMA assets, which occurredin the first nine months of 2010.

 

*Cash Flowsfrom Financing Activities*

 

Cashflows from financing activities were relatively flat during the first ninemonths of 2010 compared with the first nine months of 2009 due to minimal stockoption exercises and a minimal change in other long-term liabilities.

 

*CurrentLiquidity and Capital Resources*

 

Our cash and cashequivalents as of September 30, 2010 were held for working capitalpurposes and were invested primarily in short-term United States Treasury billsand money market funds.  We do not enterinto investments for trading or speculative purposes.

 

We have not had anysignificant capital expenditures for manufacturing since 2008.  During 2009, capital expenditures were $11.2million, mostly due to upgrades of our information technology infrastructure aswell as leasehold improvements.  Duringthe first nine months of 2010, capital expenditures were $12.3 million,primarily due to outlays made for a corporate office building and associatedland, demonstration vehicles, certain leasehold improvements and computerequipment and software.

 

The amount of capital thatwe will require depends on several factors, including without limitation, theextent and timing of sales of our products and services, performance-basedpayments, inventory costs, costs of raw materials and components, labor costs,costs of improving our financial and accounting systems, the timing and costsassociated with any expansion of our manufacturing, development, engineeringand customer support capabilities, the timing and cost of our productdevelopment and enhancement activities and our operating results.  We currently estimate that our cash flowswill be sufficient to meet our presently budgeted capital expenditures and ourother presently anticipated cash needs for the year ending December 31,2010.  In addition, we have available tous a $40 million line of credit, which expires on April 30,2012.  Furthermore, we can designate upto $5.0 million for letters of credit against the $40 million line ofcredit.  As of July 23, 2010, weobtained a letter of credit in the amount of $3.3 million Australian dollarsfor the performance of our obligations under a contract for the PMV-L vehicleprogram.  This letter of credit haslowered the availability under our line of credit to approximately $36.8million as of September 30, 2010. We may need to obtain additional sources of capital to meet our futurecash needs, which may include borrowings or the issuance of debt or equitysecurities, including common stock, and there can be no assurance that suchfinancing will be available to us when we need it or, if available, that theterms of any such financing will be satisfactory to us and not dilutive to ourshareholders.  Any failure to obtainnecessary capital as and when required could have a material adverse effect onour business, prospects, financial position, results of operations and cashflows.

 

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**Off-BalanceSheet Arrangements**

 

In accordance with thedefinition under SEC rules and regulations, the following qualify asoff-balance sheet arrangements:

 

·                  any obligation under certainguarantees or contracts,

 

·                  a retained or contingentinterest in assets transferred to an unconsolidated entity or similar entity orsimilar arrangement that serves as credit, liquidity, or market risk support tothat entity for such assets,

 

·                  any obligation under certainderivative instruments, and

 

·                  any obligation under amaterial variable interest held by the registrant in an unconsolidated entitythat provides financing, liquidity, market risk, or credit risk support to theregistrant, or engages in leasing, hedging, or research and developmentservices with the registrant.

 

The following discussionaddresses each of the above items for the Company.

 

As of September 30,2010, we did not have any obligations under certain guarantees or contracts asdefined above.

 

As of September 30,2010, we did not have any retained or contingent interest in assets as definedabove.

 

As of September 30,2010, we did not hold derivative financial instruments, as defined by FinancialAccounting Standard Board ASC Topic 815, “*Derivatives and Hedging*.”

 

As of September 30,2010, we did not participate in transactions that generate relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities (SPEs), whichwould have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.  As of September 30, 2010 andDecember 31, 2009, we were not involved in any unconsolidated SPEtransactions.

 

**ContractualObligations**

 

We have future obligationsunder various contracts relating to debt and interest payments, operatingleases, and purchase obligations.  During the nine months ended September 30,2010, there were no significant changes to these obligations as reported in ourAnnual Report on Form 10-K for the year ended December 31, 2009,except that our purchase obligations increased to $148.9 million as of September 30,2010, from $68.2 million as of December 31, 2009.  The increase in purchase obligations as of September 30,2010 was primarily due to new purchase orders related to modernization salesand engineering services.

 

 

**CriticalAccounting Policies and Estimates**

 

For the quarterly period endedSeptember 30, 2010, there were no significant changes in criticalaccounting policies and estimates from those disclosed in our Annual Report onForm 10-K for the year ended December 31, 2009 filed with the SEC on March 8,2010.

 

**NewAccounting Pronouncements**

 

See Note 1, *Summary of Significant Accounting Policies*, to the condensedconsolidated financial statements for a description of the new accountingstandards that are applicable to us.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

**CommodityPrices**

 

We are exposed to marketrisk from changes in commodity prices. If the price of steel increases significantly, 

 

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the cost of our products could increase.  It is unlikely we will be able to pass onthis cost under our current contracts. As a result, if the cost of our raw materials increases, ourprofitability, if any, could decrease.

 

Webuy and stock key steel materials at competitive current prices, based onprojected trends of steel surcharge movement. Additionally, we generally add annual escalations and adjust prices forextraordinary circumstances to all long-term steel contracts.  In cases where subcontractors purchase steeldirectly, we generally mirror supplier terms and conditions to customer termsand conditions to mitigate commodity risks.

 

**ForeignCurrency**

 

The majority of our businessis denominated in U.S. dollars and, as such, movement in the foreign currencymarkets will have a minimal direct impact on our business.

 

**InterestRates**

 

Although our currentfinancing arrangement is at a variable rate, we do not have any borrowingsunder our $40 million line of credit.  On July 23, 2010, we obtaineda letter of credit in the amount of $3.3 million Australian dollars for theperformance of our obligations under a contract for the PMV-L vehicleprogram.  This letter of credit haslowered the availability under our line of credit to approximately $36.8million as of September 30, 2010. We currently are not directly at risk of interest ratefluctuations.  As our financing needschange in the future, interest rate risk may become a more significant issuefor us.

 

Currently, we do not use anyderivative financial instruments for the purpose of reducing our exposure toadverse fluctuations in interest rates, foreign currency exchange or commodityprices.  We are not a party to leveragedderivatives nor do we hold or issue financial investments for speculativepurposes.

 

**Item 4.Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Disclosure controls andprocedures are controls and other procedures that are designed to providereasonable assurance that the information required to be disclosed in reportsfiled or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC and accumulated and communicated to management, including thechief executive officer and chief financial officer, as appropriate to allowtimely decisions regarding required disclosure.

 

Our management, at thedirection of our chief executive officer (our principal executive officer)  and chief financial officer (our principalfinancial officer), performed an evaluation of the effectiveness and design ofour disclosure controls and procedures (as defined in Rule 13a-15(e) andRule 15d-15(e) under the Exchange Act) as of September 30,2010.  Based on this evaluation, ourchief executive officer and chief financial officer concluded that, as of September 30,2010, Force Protection’s disclosure controls and procedures were effective.

 

**Changes in Internal Control overFinancial Reporting**

 

There were no changes in ourinternal control over financial reporting (as defined in Rule 13a-15(f) andRule 15d-15(f) under the Exchange Act) that occurred during thequarter ended September 30, 2010, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

The effectiveness of ForceProtection’s or any system of disclosure controls and procedures and internalcontrol over financial reporting is subject to certain limitations, includingthe exercise of judgment in designing, implementing, and evaluating thecontrols and procedures, the assumptions used in identifying the likelihood offuture events, and the inability to eliminate misconduct completely.  As a result, our disclosure controls andprocedures and internal control over financial reporting may not prevent allerrors or improper acts or ensure that all material information will be madeknown to appropriate management in a timely fashion.

 

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**PART II. OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

**ShareholderClass Action and Derivative Actions**

 

On March 10, 2008, thefirst of ten related class action lawsuits was filed against us and certain ofour former and current directors and officers in the United States DistrictCourt for the District of South Carolina, Charleston Division, on behalf of apurported class of investors who purchased or otherwise acquired our stockduring the period between August 14, 2006 and February 29, 2008.  The complaints seek class certification, andthe allegations include, but are not limited to, allegations that the defendantsviolated the Securities Exchange Act of 1934 and made false or misleadingpublic statements and/or omissions concerning our business, internal controls,and financial results.  The individualclass action lawsuits were consolidated on June 10, 2008, under thecaption *In Re Force Protection, Inc. SecuritiesLitigation*, Action No. 2:08-cv-845-CWH.  An agreement to settle the consolidatedshareholder securities class action lawsuit has been reached, which waspreliminarily approved by the Court on October 5, 2010.  The settlement amount is $24.0 million, amajority of which will be covered by insurance upon final approval of the classand derivative action settlements.  Ahearing to determine the final approval of the class action settlement is setfor January 25, 2011.

 

Between March 27, 2008and September 24, 2010, a series of shareholder derivative actions werefiled in both state and federal courts against certain of our former andcurrent directors and officers alleging that the individual defendants breachedfiduciary duties, abused control, engaged in gross mismanagement and wastedcorporate assets and were unjustly enriched. Recovery is sought for the benefit of the Company, which has been nameda nominal defendant in each derivative action. The state court actions pending in South Carolina were consolidated on May 18,2009.  A hearing on various proceduralmotions is set for December 7, 2010.

 

On September 24, 2010,a related shareholder derivative action captioned *NicolaSaulle v. Frank Kavanaugh, et al.,* Case No. 10 OC 00442 1B wasfiled in state court in Nevada.

 

Four derivative lawsuitspending in the United States District Court for the District of South Carolina,Charleston Division, were consolidated on March 31,2009, under the caption *In Re Force Protection, Inc. Derivative Litigation*, Action No. 2:08-cv-01907-CWH.  An agreement to settle the shareholderderivative lawsuit pending in federal court (but not the state courtproceeding) has been reached, which was preliminarily approved by the court on October 5,2010.  The settlement provides that theCompany will adopt certain corporate governance practices, receive a payment of$2.25 million from insurance, and pay plaintiffs’ attorney’s fees and expensesin an amount not to exceed $2.3 million. A hearing to determine the final approval of the federal derivativeaction settlement is set for December 13, 2010.

 

Neither the Company nor anyof its present and former directors and officers has admitted any wrongdoing orliability in connection with these settlements. Additionally, each settlement provides that the parties have reached amutually agreeable resolution of the case to avoid protracted and expensivelitigation, including the outcome and risks associated with proceeding.

 

**OtherDisputes**

 

We have received a total of78 complaints over the last three years from current and former employees filedwith the United States Equal Employment Opportunity Commission alleging, amongother things, race and/or gender discrimination.  We have responded to the complaints as suchresponses have become due, and have investigated the allegations.

 

On June 26, 2009, atemporary independent contractor whose services we terminated in 2007 filed acomplaint against the Company in the United States District Court for theDistrict of South Carolina, Charleston Division, as Civil Action No. 2:09cv1708-DCN-BM,which alleges a violation under the employee protection provisions ofSection 806 of the Corporate and Criminal Fraud Accountability Act of2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1514A.  The former independent contractor allegesthat we terminated his engagement in retaliation for his allegation of certaincorporate governance, government contracting, accounting and otherirregularities.  On March 12, 2010,we filed motions to dismiss certain claims in the plaintiff’s complaint.

 

In September 2010, wesubmitted a voluntary disclosure to the Directorateof Defense Trade Controls (DDTC)

 

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in regard to the inadvertent import of avehicle into the U.S. without proper DDTC authorization.  Simultaneous with this submission, werequested authorization to allow the vehicle to remain in the U.S. and bedisplayed at various locations, which the DDTC granted.  Our submission to the DDTC also proposedself-corrective actions, which we are implementing.  We have not received a response to ourproposal from the DDTC or notice of any fines, penalties or administrativeactions.

 

Although we intend to defendourselves in connection with the foregoing legal proceedings and claims, therecan be no assurance that we will ultimately prevail in any of these matters,and any settlement or adverse judgment may have a material adverse effect onour business or financial position, results of operations, or cash flows.  We are also a party to other litigation whichwe consider routine and incidental to our business.  We may be involved from time to time in otherlitigation that could have a material effect on our operations orfinances.  Other than the litigationdescribed above, we are not aware of any pending or threatened litigationagainst us that could have a material adverse effect on our business orfinancial position, results of operations or cash flows.

 

**Item 1A.Risk Factors**

 

In addition to the riskfactors set forth below and other information set forth in this QuarterlyReport on Form 10-Q, you should carefully consider the risk factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2009 filed with the SEC on March 8,2010, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K and asdescribed below are not the only risks facing Force Protection.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition, operatingresults or cash flows.

 

**Presently,all of our contracts are on a fixed-price basis, which could subject us tolosses if there are cost overruns.**

 

Under a fixed-price contract, we receive onlythe amount indicated in the contract, regardless of the actual cost to producethe goods.  While firm fixed-price contracts allow us to benefit frompotential cost savings, they also expose us to the risk of cost overruns. Also, many of the contracts we receive from the U.S. military are sole sourcewith a “not-to-exceed” amount and are subject to “definitization,” meaning thatthe contract price is not agreed upon at contract inception.  If theestimates we use to calculate the contract price are incorrect, the cost toperform the work proves to be greater than the price, or the definitizedcontract price is less than the cost, we could incur losses.  In addition,some of our contracts have specific provisions relating to schedule andperformance, which may result in penalties for failure to perform.  Accordingly,there can be no assurance that the actual prices we receive under contractswill not be substantially less than our estimates or costs, which wouldadversely affect our cash flows, our operating results and could result inlosses.

 

**We may make acquisitions**, **which may pose risks to ourbusiness and dilute the ownership of our existing stockholders.**

 

We may enter intoacquisitions in the future in an effort to enhance shareholder value.  We may enter into such arrangements in thefuture in order to expand our capabilities, enter new markets or increase ourmarket share.  Acquisitions involve acertain amount of risks and uncertainties that could result in our notachieving expected benefits.  Withrespect to acquisitions, such risks include difficulties in integrating newlyacquired businesses and operations in an efficient and cost-effective manner;challenges in achieving expected strategic objectives, cost savings and otherbenefits; the risk that the acquired businesses’ markets do not evolve as anticipatedand that the technologies acquired do not prove to be those needed to besuccessful in those markets; the risk that we pay a purchase price that exceedswhat the future results of operations would have merited; and the potentialloss of key employees of the acquired businesses.  In addition, unanticipated delays ordifficulties in effecting acquisitions may divert the attention of ourmanagement and resources from our existing operations.  Future acquisitions by us could also resultin large and immediate write-offs or assumptions of debt and contingentliabilities, any of which may have a material adverse effect on ourconsolidated financial position, results of operations or cash flows.

 

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

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**Item 3.Defaults Upon Senior Securities**

 

None.

 

**Item 5.Other Information**

 

None.

 

**Item 6.Exhibits**

 

Thefollowing is an index of the exhibits included in this Quarterly Report on Form 10-Q.

 

**EXHIBIT INDEX**

 

Inreviewing the agreements included as exhibits to this Quarterly Report onForm 10-Q, investors are reminded that they are included to provide youwith information regarding their terms and are not intended to provide anyother factual or disclosure information about Force Protection or the otherparties to the agreements.  Some of theagreements contain representations and warranties by each of the parties to theapplicable agreement.  Theserepresentations and warranties have been made solely for the benefit of theother parties to the applicable agreement and:

 

·                  Should not in all instancesbe treated as categorical statements of fact, but rather as a way of allocatingthe risk to one of the parties if those statements prove to be inaccurate,

 

·                  Have been qualified by thedisclosures that were made to the other party in connection with thenegotiation of the applicable agreement, which disclosures are not necessarilyreflected in the agreement,

 

·                  May apply standards ofmateriality in a way that is different from what may be viewed as material toyou or other investors, and

 

·                  Were made only as of thedate of the applicable agreement or such other date or dates as may bespecified in the agreement and are subject to more recent developments.

 

Accordingly,the representations and warranties may not describe the actual state of affairsas of the date they were made or at any other time.  Additional information about ForceProtection, Inc. may be found elsewhere in this Quarterly Report onForm 10-Q and Force Protection’s other public filings, which are availablewithout charge on Force Protection, Inc.’s website at *www.forceprotection.net*.

 
| **NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                           |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                |
| 2.1        |       | Agreement and Plan of  Merger, filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-K  filed September 15, 2008, is hereby incorporated by reference.                                            |
|       |       |                                                                                                                                                                                                                      |
| 3.1        |       | Restated Articles of  Incorporation, filed as Exhibit 3.1 to the Company’s Quarterly Report on  Form 10-K filed May 11, 2009, is hereby incorporated by reference.                                    |
|       |       |                                                                                                                                                                                                                      |
| 3.2        |       | Certificate of Amendment  to Articles of Incorporation, filed as Exhibit 3.1 to the Company’s  Current Report on Form 8-K filed November 26, 2008, is hereby  incorporated by reference.              |
|       |       |                                                                                                                                                                                                                      |
| 3.3        |       | Certificate of Correction  to Restated Articles of Incorporation, filed as Exhibit 3.3 to the  Company’s Quarterly Report on Form 10-Q filed May 11, 2009, is  hereby incorporated by reference.      |
|       |       |                                                                                                                                                                                                                      |
| 3.4        |       | Second Amended and  Restated By-Laws of Force Protection, Inc., filed as Exhibit 3.2 to  the Company’s Current Report on Form 8-K filed November 26, 2008,  is hereby incorporated by reference. |

 

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| **NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                          |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                               |
| 10.1       |       | Amendment of  Solicitation/Modification of Contract under Contract No. M67854-07-D-5031  with the United States Marine Corps Systems Command, dated August 19,  2010. † * |
|       |       |                                                                                                                                                                                     |
| 31.1       |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. †                                                                    |
|       |       |                                                                                                                                                                                     |
| 31.2       |       | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. †                                                                    |
|       |       |                                                                                                                                                                                     |
| 32.1       |       | Certification of Officers  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. †                                   |

 

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(Exhibits marked with a (†)are filed electronically herewith.)

 

(Exhibits marked with oneasterisk (*) have portions of the exhibit omitted pursuant to a confidentialtreatment request. This information has been filed or will be filed separatelywith the Securities and Exchange Commission.)

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
| ** **                   | **FORCE  PROTECTION, INC.** |
|------------------------------|----------------------------------|
| * *                     | *(Registrant)*                   |
| * *                     | * *                         |
| * *                     | * *                         |
| Date: November 3,  2010 | By:                              | /s/ MICHAEL MOODY |
|                         | ** **                       | **Name:** | **Michael  Moody** |
|                         | ** **                       | **Title:** | **Chairman,  Chief Executive Officer and** |
|                         | ** **                       | ** ** | **President  (principal executive officer)** |
| ** **                   | ** **                       | ** ** |
| ** **                   | ** **                       | ** ** |
| Date: November 3,  2010 | By:                              | /s/ CHARLES MATHIS |
|                         | ** **                       | **Name:** | **Charles  Mathis** |
|                         | ** **                       | **Title:** | **Chief  Financial Officer** |
|                         | ** **                       | ** ** | **(principal  financial and accounting officer)** |

 

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