Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x**** ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2010**

 

**OR**

 

**o****  ****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from                    to                    **

 

**CommissionFile Number 001-33253**

 

**FORCEPROTECTION, INC.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Nevada**                                                       | ** ** | **84-1383888**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

| **9801  Highway 78, Building No. 1  Ladson, South Carolina** | ** ** | **29456**  |
|-------------------------------------------------------------------|------------|------------|
| (Address of  Principal Executive Offices)                         |       | (Zip Code) |

 

**(843)574-7000**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  x  Yes  o  No

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  o Yes  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” in Rule 12b-2of 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

 

The registrant had70,274,140 shares of common stock outstanding as of April 29, 2010.

 

 

 

----

Table of Contents

 

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  4. (Removed and Reserved)                                                                     |
|                                                                                                     |
| Item  5. Other Information                                                                               |
|                                                                                                     |
| Item  6. Exhibits                                                                                   |

 

2

----

Table of Contents

 

**PART I.FINANCIAL STATEMENTS**

 

**Item1.**   **Financial Statements**

** **

**ForceProtection, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                          | ** ** | **As  of March 31,** | ** ** | **As  of December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2010**                  | ** ** | **2009**                     | ** ** |
| ** **                                          | ** ** | **(In  Thousands)**       | ** ** |
| **Assets**                                          |       |                      |       |                         |       |
| **Current assets:**                                 |       |                      |       |                         |       |
| Cash  and cash equivalents                          |       | $                         | 134,103    |                         | $          | 147,254 |   |
| Accounts  receivable, net                           |       | 136,288                   |       | 143,480                      |       |
| Inventories                                         |       | 77,981                    |       | 74,075                       |       |
| Deferred  income tax assets                         |       | 16,167                    |       | 16,235                       |       |
| Income  taxes receivable                            |       | 1,352                     |       | 1,352                        |       |
| Other  current assets                               |       | 3,656                     |       | 3,031                        |       |
| Total  current assets                               |       | 369,547                   |       | 385,427                      |       |
| Property  and equipment, net                        |       | 57,469                    |       | 58,918                       |       |
| Investment  in unconsolidated joint venture         |       | 2,519                     |       | 2,541                        |       |
| Other  assets, net                                  |       | 435                       |       | 202                          |       |
| **Total assets**                                    |       | $                         | 429,970    |                         | $          | 447,088 |   |
| ** **                                          |       |                      |       |                         |       |
| **Liabilities and Shareholders’  Equity**      |       |                      |       |                         |       |
| **Current liabilities:**                            |       |                      |       |                         |       |
| Accounts  payable                                   |       | $                         | 67,420     |                         | $          | 86,588 |   |
| Due  to United States government                    |       | 26,716                    |       | 25,965                       |       |
| Advance  payments on contracts                      |       | 3,648                     |       | 1,164                        |       |
| Other  current liabilities                          |       | 17,441                    |       | 21,044                       |       |
| Total  current liabilities                          |       | 115,225                   |       | 134,761                      |       |
| Deferred  income tax liabilities                    |       | 1,225                     |       | 1,236                        |       |
| Other  long-term liabilities                        |       | 315                       |       | —                       |       |
|                                                |       | 116,765                   |       | 135,997                      |       |
| Commitments  and contingencies                      |       |                      |       |                         |       |
|                                                |       |                      |       |                         |       |
| **Shareholders’ equity:**                      |       |                      |       |                         |       |
| Common  stock                                       |       | 70                        |       | 70                           |       |
| Additional  paid-in capital                         |       | 261,159                   |       | 260,112                      |       |
| Accumulated  other comprehensive income             |       | 61                        |       | 129                          |       |
| Retained  earnings                                  |       | 51,915                    |       | 50,780                       |       |
| Total  shareholders’ equity                    |       | 313,205                   |       | 311,091                      |       |
| **Total liabilities and shareholders’ equity** |       | $                         | 429,970    |                         | $          | 447,088 |   |

 

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

 

3

----

Table of Contents

 

**ForceProtection, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                      | ** ** | **For  the three months ended**            | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **March 31,**                         | ** ** |
| ** **                                      | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **(In  Thousands, Except Per Share Data)** | ** ** |
| Net  sales                                      |       | $                                          | 134,847    |   | $ | 184,734 |   |
| Cost  of sales                                  |       | 109,458                                    |       | 147,832 |   |
| Gross  profit                                   |       | 25,389                                     |       | 36,902 |   |
| General  and administrative expenses            |       | 18,740                                     |       | 20,851 |   |
| Research  and development expenses              |       | 4,847                                      |       | 4,605 |   |
| Operating  income                               |       | 1,802                                      |       | 11,446 |   |
| Other  income (expense), net                    |       | 73                                         |       | (62 | ) |
| Interest  expense, net                          |       | (132                                       | )          | (136 | ) |
| Income  before income tax expense               |       | 1,743                                      |       | 11,248 |   |
| Income  tax expense                             |       | (607                                       | )          | (3,872 | ) |
| Net  income                                     |       | $                                          | 1,136      |   | $ | 7,376 |   |
| **Earnings per common share:**                  |       |                                       |       |   |   |
| Basic                                           |       | $                                          | 0.02       |   | $ | 0.11 |   |
| Diluted                                         |       | $                                          | 0.02       |   | $ | 0.11 |   |
| **Weighted average common shares outstanding:** |       |                                       |       |   |   |
| Basic                                           |       | 68,671                                     |       | 68,408 |   |
| Diluted                                         |       | 69,505                                     |       | 68,755 |   |

 

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

 

4

----

Table of Contents

 

**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **For  the three months ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| ** **                                                                                          | ** ** | **(In  Thousands)**                            | ** ** |
| **Cash flows from operating activities:**                                                           |       |                                           |       |   |   |
| Net  income                                                                                         |       | $                                              | 1,136      |   | $ | 7,376 |   |
| Adjustments  to reconcile net income to net cash (used in) provided by operating  activities – |       |                                           |       |   |   |
| Depreciation  and amortization                                                                      |       | 3,972                                          |       | 3,237 |   |
| Deferred  income tax provision                                                                      |       | 93                                             |       | 3,302 |   |
| Income  tax effect realized from stock transactions                                                 |       | (12                                            | )          | — |   |
| Stock-based  compensation                                                                           |       | 1,018                                          |       | 315 |   |
| Provision  for inventory                                                                            |       | 473                                            |       | 210 |   |
| Warranty  reserve                                                                                   |       | 336                                            |       | — |   |
| Loss  on disposal of property and equipment                                                         |       | 9                                              |       | — |   |
| Equity  in earnings of unconsolidated joint venture                                                 |       | (9                                             | )          | 205 |   |
| (Increase)  decrease in assets –                                                               |       |                                           |       |   |   |
| Accounts  receivable                                                                                |       | 7,192                                          |       | (13,928 | ) |
| Inventories                                                                                         |       | (4,379                                         | )          | (12,216 | ) |
| Income  taxes receivable                                                                            |       | —                                         |       | (10,324 | ) |
| Other  assets                                                                                       |       | (936                                           | )          | (287 | ) |
| Increase  (decrease) in liabilities –                                                          |       |                                           |       |   |   |
| Accounts  payable                                                                                   |       | (19,057                                        | )          | 8,273 |   |
| Due  to United States government                                                                    |       | 751                                            |       | 19,403 |   |
| Advance  payments on contracts                                                                      |       | 2,484                                          |       | 14,230 |   |
| Other  liabilities                                                                                  |       | (3,612                                         | )          | (5,643 | ) |
| Total  adjustments                                                                                  |       | (11,677                                        | )          | 6,777 |   |
| **Net cash (used in) provided by operating activities**                                             |       | (10,541                                        | )          | 14,153 |   |
| **Cash flows from investing activities:**                                                           |       |                                           |       |   |   |
| Capital  expenditures                                                                               |       | (2,580                                         | )          | (3,081 | ) |
| Proceeds  from the sale of fixed assets                                                             |       | 15                                             |       | — |   |
| Investment  in unconsolidated joint venture                                                         |       | —                                         |       | (2,130 | ) |
| **Net cash used in investing activities**                                                           |       | (2,565                                         | )          | (5,211 | ) |
| **Cash flows from financing activities:**                                                           |       |                                           |       |   |   |
| Proceeds  from issuance of common stock                                                             |       | 18                                             |       | 15 |   |
| Income  tax effect realized from stock transactions                                                 |       | 12                                             |       | — |   |
| Net  decrease in other long-term liabilities                                                        |       | —                                         |       | (128 | ) |
| **Net cash provided by (used in) financing activities**                                             |       | 30                                             |       | (113 | ) |
| **Effect of foreign currency rate changes on cash**                                                 |       | (75                                            | )          | — |   |
| **(Decrease) increase in cash and cash equivalents**                                                |       | (13,151                                        | )          | 8,829 |   |
| **Cash and cash equivalents at beginning of year**                                                  |       | 147,254                                        |       | 111,001 |   |
| **Cash and cash equivalents at end of period**                                                      |       | $                                              | 134,103    |   | $ | 119,830 |   |
| **Supplemental cash flow information:**                                                             |       |                                           |       |   |   |
| Cash  paid during the period for                                                                    |       |                                           |       |   |   |   |   |
| Income  taxes                                                                                       |       | $                                              | 1,187      |   | $ | 15,101 |   |
| Interest,  net of amounts capitalized                                                               |       | $                                              | 98         |   | $ | 22 |   |
| **Supplemental schedule of noncash investing and financing  activities:**                           |       |                                           |       |   |   |
| Property  and equipment additions in accounts payable                                               |       | $                                              | 839        |   | $ | 438 |   |

 

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

 

5

----

Table of Contents

 

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 which are in harm’s way. We design, manufacture, test, deliver and support our blast- andballistic-protected products to increase the survivability of the users of ourproducts.  Our specialty vehicles, whichwe believe are at the forefront of blast- and ballistic-protected technology,are designed to protect their occupants from landmines, hostile fire, andimprovised explosive devices (“IEDs”). We are a key provider of the U.S. military’s Mine Resistant AmbushProtected (“MRAP”) vehicle program and have sold and delivered over 3,000vehicles under this program.  We alsoprovide our Cougar and Buffalo mine-protected vehicles to several foreigncustomers, including the U.K. Ministry of Defence (“MoD”) which has purchasedthree variants of our Cougar vehicle. Complementing these efforts, we are designing, developing and marketingnew vehicle platforms (including the Ocelot and the Joint All-Terrain ModularMobility Asset (“JAMMA”)) that provide increased modularity, speed, mobilityand concealment with enhanced levels of blast- and ballistic-protection.  Across all vehicle programs we have soldapproximately 4,500 vehicles since 2005. Supporting our vehicle design, development and production initiatives,we develop, manufacture, test, deliver and support products and services aimedat further enhancing the survivability of our users against additionalthreats.  Capitalizing on our strengthsin survivability 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 Force Protection, Inc.and its subsidiaries unless otherwise stated or indicated by context.

 

In 2009, we formedIntegrated Survivability Technologies Limited, an England and Wales company,referred to as IST, a joint venture between Force Protection Europe Limited, asubsidiary of Force Protection Industries, Inc., and NP Aerospace Limited,a subsidiary of The Morgan Crucible Company plc.  Pursuant to the terms ofthe joint venture, IST acts as the prime contractor for vehicles and relatedtotal life cycle support awarded by the U.K. MoD to ensure that this customerhas a single point of contact for its Wolfhound, Buffalo, Mastiff and Ridgback vehicles. We account for this joint venture as an equity-method investment.  In September 2009, we formed ForceProtection Australasia Pty Ltd, an Australian company, to pursue marketopportunities in Australia and Asia. Force Protection Australasia Pty Ltd is a wholly owned subsidiary ofForce Protection Europe Limited.

 

We are focused onenhancing the market presence of Force Protection Europe Limited and leveragingits brand strength in the United Kingdom and Europe.  Through Force Protection Europe Limited, wehave developed a new vehicle platform with Ricardo UK Limited, the Ocelot, alight-weight protected vehicle that provides increased modularity, speed,mobility and off-road capability with MRAP-like survivability qualities.  The Ocelot has been submitted by ForceProtection Europe Limited to the U.K. MoD for the Light Protected PatrolVehicle, or LPPV, competition.  In April 2010,we received a contract from the U.K. MoD for the purchase of two Ocelotvehicles for further testing for the LPPV program.  The Ocelot also has been proposed to theAustralian government for the Protected Mobility Vehicle-Light program.

 

We are also collaboratingwith a third party on the JAMMA, a light-weight, hybrid, high-performance,high-speed, all-terrain vehicle that is transportable inside a V-22 Ospreyhelicopter and features an attachment system for threat-specific armor.  The JAMMA was specifically developed anddesigned for an upcoming customer requirement.

 

***Basis of Presentation and Consolidation***

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with our audited consolidated financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2009 filedwith the United States Securities and Exchange Commission (“SEC”) on March 8,2010.  These unaudited condensedconsolidated financial statements have been prepared pursuant to Rule 10-01of Regulation S-X.  Certain informationand note disclosures normally included in annual financial statements preparedin accordance with generally accepted accounting principles in the UnitedStates of America (“GAAP”) have been condensed or omitted pursuant to those rules andregulations, although we believe that the disclosures made herein

 

6

----

Table of Contents

 

are adequate to make theinformation 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 Protection Industries, Inc.and Force Protection Technologies, Inc. We eliminate from our financial results all significant intercompanyaccounts and transactions.  Certain priorperiod information has been reclassified to conform to the current periodpresentation.

 

***Fair Value of Financial Instruments***

 

FASBStatement No. 107, *Disclosures aboutFair Value of Financial Instruments*, which was primarily codifiedinto Topic 825, “*Financial Instruments*”in the Accounting Standards Codification (“ASC”), requires disclosures of thefair value of financial instruments.  Ourfinancial instruments include cash and cash equivalents, accounts receivable,accounts payable, accrued liabilities and amounts due to United States government.  The carrying amounts of cash and cashequivalents, accounts receivable, accounts payable, accrued liabilities andamounts due to the U.S. government, approximate their fair value because of theshort-term maturity and highly liquid nature of these instruments.  The carrying values of our financialinstruments approximate their fair value as of March 31, 2010 and December 31,2009.

 

***Recent Accounting Pronouncements***

 

In June 2009, theFASB issued FASB Statement No. 168, *The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples,* whichwas codified into Topic 105 “*Generally AcceptedAccounting Standards.*” This guidance launched the FASB Accounting Standards Codification thatis the single source of non-SEC authoritative GAAP.  It is effective for interim and annualperiods beginning after September 15, 2009.  We adopted this guidance as of September 30,2009.  This guidance did not have amaterial impact on our consolidated financial position, results of operationsor cash flows.

 

In October 2009, theFASB issued 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 FASB issued 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 beenevaluated.  This guidance is effectivefor financial statements issued subsequent to February 26, 2010.  We adopted this guidance on this date.  This guidance did not have a material impacton our consolidated financial position, results of operations or cash flows.

 

We have determined thatall other recently issued accounting guidance will not have a material impacton our consolidated financial position, results of operations and cash flows,or do not apply to our operations.

 

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

 

Accounts receivableconsist of the following (in thousands):

 
| ** **                 | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2010**                 | ** ** | **2009**                    | ** ** |
| United States government   |       | $                        | 109,480    |                        | $          | 122,070 |   |
| Other  accounts receivable |       | 26,808                   |       | 21,410                      |       |
| Accounts receivable, net   |       | $                        | 136,288    |                        | $          | 143,480 |   |

 

7

----

Table of Contents

 

As of March 31, 2010and December 31, 2009, our accounts receivable included $79.7 million and$57.2 million, respectively, of earned and unbilled accounts receivable, ofwhich $10.6 million and $6.4 million, respectively, is earned and unbilled toIntegrated Survivability Technologies Limited and $69.1 million and $50.8million, respectively, is earned and unbilled to the U.S. government.  The earned and unbilled accounts receivableas of March 31, 2010 and December 31, 2009 primarily result fromnot-to-exceed undefinitized contracts whereby, although the products have beendelivered, we cannot fully bill until the contracts are definitized. Otheraccounts receivable include amounts that relate to non-government entities andthe sale of raw materials to suppliers.  Any gain or loss on the sale ofraw materials is included in*Other income(expense), net* in the accompanying condensed consolidated statementsof operations.

 

**3.**    **Inventories**

 

Inventories consist ofthe following (in thousands):

 
| ** **                | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **2010**                 | ** ** | **2009**                    | ** ** |
| Raw material and supplies |       | $                        | 49,073     |                        | $          | 57,026 |   |
| Work  in process          |       | 23,125                   |       | 16,099                      |       |
| Finished goods            |       | 5,783                    |       | 950                         |       |
| Inventories               |       | $                        | 77,981     |                        | $          | 74,075 |   |

 

Due to obsoleteinventories and to account for our inventory at the lower of cost or market, wereduced the cost basis of our raw material and supplies and charged to*Cost of sales* $0.5 million and $0.2 million during the three-month periods ended March 31,2010 and 2009, respectively.

 

Work in process consistsprimarily of vehicles and subassemblies in process and overhead costscapitalized in ending inventory.

 

As of March 31,2010, the finished goods inventory consisted primarily of Wolfhound vehiclesproduced for a contract that was awarded on May 3, 2010.

 

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

 

Property and equipmentconsist of the following (in thousands):

 
| ** **                                            | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **2010**                 | ** ** | **2009**                    | ** ** |
| Land                                                  |       | $                        | 4,419      |                        | $          | 4,419 |   |
| Buildings                                             |       | 13,303                   |       | 13,246                      |       |
| Leasehold improvements                                |       | 15,809                   |       | 15,661                      |       |
| Machinery and equipment; including tooling and  molds |       | 34,613                   |       | 33,451                      |       |
| Computer equipment and software                       |       | 15,856                   |       | 15,297                      |       |
| Furniture and fixtures                                |       | 3,685                    |       | 3,668                       |       |
| Demonstration and other vehicles                      |       | 2,824                    |       | 2,657                       |       |
| Manuals                                               |       | 705                      |       | 705                         |       |
|                                                  |       | 91,214                   |       | 89,104                      |       |
| Less: Accumulated depreciation                        |       | (35,721                  | )          | (31,887                     | )          |
|                                                  |       | 55,493                   |       | 57,217                      |       |
| Construction in progress                              |       | 1,976                    |       | 1,701                       |       |
| Property and equipment, net                           |       | $                        | 57,469     |                        | $          | 58,918 |   |

 

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

 

We provide for incometaxes using 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

 

8

----

Tableof Contents

 

in the period in whichthey occur.  Each quarter, we re-evaluateour estimated tax expense for the year and make adjustments for changes in theestimated tax rate.  Additionally, weevaluate the realizability of our deferred tax assets on a quarterlybasis.  Our evaluation considers allpositive and negative evidence and factors, such as the scheduled reversal oftemporary differences, historical and projected future taxable income orlosses, and prudent and feasible tax planning strategies.

 

The**incometax expense for the three-month period ended March 31, 2010 wasbased on the estimated effective tax rates applicable for the fiscal yearending December 31, 2010, after considering items specifically related tothe interim period.  The income taxexpense for the three-month period ended March 31, 2009 was based on theestimated effective tax rates applicable for the fiscal year ended December 31,2009, after considering items specifically related to the interim period.

 

Force Protection issubject to United States federal, state, and local income taxes. * Income beforeincome tax expense*isas follows (in thousands):

 
| ** **                       | ** ** | **For the three months ended  March 31,** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| Income before income tax expense |       | $                                              | 1,743      |   | $ | 11,248 |   |
|                                  |            |                                                |            |  |  |  |  |

 

A reconciliation of thestatutory federal income tax expense rate to the effective income tax expenserate is as follows:

 
| ** **                                         | ** ** | **For the three months ended  March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| Income tax expense at statutory  rate              |       | 35.0                                           | %          | 35.0 | % |
| Increase (decrease) in tax rate resulting from:    |       |                                           |       |   |   |
| State income taxes, net of  federal tax benefit    |       | 1.3                                            |       | 0.7 |   |
| Research and development credit                    |       | —                                         |       | (2.6 | ) |
| Domestic Production Activities  Deduction          |       | (2.9                                           | )          | (0.3 | ) |
| Interest expense related to uncertain tax benefits |       | 0.3                                            |       | — |   |
| Nondeductible items                                |       | 1.1                                            |       | 1.6 |   |
| Effective income tax expense rate                  |       | 34.8                                           | %          | 34.4 | % |

 

The effective income taxrate is the provision for income tax expense as a percent of income beforeincome taxes.  The 2010 effective rate islower than the expected federal statutory rate of 35% due to the Domestic ProductionActivities Deduction, partially offset by state income taxes, nondeductibleitems, and interest expense related to uncertain tax benefits.

 

Tax years ended December 31,2002 through December 31, 2009 remain open and are subject to examinationby the Internal Revenue Service. However, we believe that we have appropriate support for the income taxpositions taken and to be taken on our income tax returns and that our incometax receivable and accruals for tax liabilities are adequate for all open yearsbased on an assessment of many factors including past experience andinterpretations of tax laws applied to the facts of each matter.  However, we do have a $1.1 million reserve,which includes approximately $37,000 of interest, for prior years’ income taxesas a result of applying the guidance in FASB ASC Topic 740, “*Income Taxes*.”  Ifrecognized, the entire $1.1 million would favorably impact the Company’seffective tax rate.  It is not expectedthat within the next 12 months the effective tax rate will be impacted bythe resolution of some or all of the matters by various taxingauthorities.  We include interest andpenalties related to federal and state income taxes, if any, as a component of*Income tax expense* in the accompanyingcondensed consolidated statements of operations.

 

**6.**    **Earnings Per Common Share and Comprehensive Income**

 

***EarningsPer Common Share***

 

The following table showsthe information used in the calculation of basic and diluted earnings percommon

 

9

----

Tableof Contents

 

share (in thousands,except number of shares and per share amounts):

 
| ** **                                                      | ** ** | **For the three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                      | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| **Numerator – Basic and diluted:**                         |       |                                           |       |   |   |
| Net  income                                                     |       | $                                              | 1,136      |   | $ | 7,376 |   |
| **Denominator:**                                                |       |                                           |       |   |   |
| Weighted  average common shares outstanding –  basic  |       | 68,671,310                                     |       | 68,407,606 |   |
| Add: Stock options                                              |       | 119,744                                        |       | 69,770 |   |
| Add:  Stock grants                                              |       | 714,420                                        |       | 277,580 |   |
| Weighted average common shares outstanding –  diluted |       | 69,505,474                                     |       | 68,754,956 |   |
| **Basic earnings per common share:**                            |       |                                           |       |   |   |
| Net income – basic                                         |       | $                                              | 0.02       |   | $ | 0.11 |   |
| **Diluted earnings per common share:**                          |       |                                           |       |   |   |
| Net income – diluted                                       |       | $                                              | 0.02       |   | $ | 0.11 |   |

 

The calculation ofearnings per common share is based on the weighted-average number of our commonshares outstanding during the applicable period.  The calculation for diluted earnings percommon share recognizes the effect of all dilutive potential common shares thatwere outstanding during the respective periods, unless their impact would beanti-dilutive.  We use the treasury stock method to calculate the dilutiveeffect of stock options and other common stock equivalents (potentiallydilutive shares). These potentially dilutive shares include stock options andunvested restricted stock grants.  We didnot include stock options to purchase 192,797 and zero shares of common stockin our computation of diluted earnings per share in the three-month periodsending March 31, 2010 and 2009, respectively, as the effect of includingsuch options would be anti-dilutive.

 

***ComprehensiveIncome***

 

Our comprehensive incomewas $1.1 million and $7.4 million for the three-month periods ended March 31,2010 and 2009, respectively.  Thecomponents of our comprehensive income are net income and foreign currencytranslation adjustments of a $0.1 million net loss in 2010 and zero in 2009.

 

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

 

***FinancingCommitments— Credit Facility***

 

On July 20, 2007, weentered into a revolving credit agreement with Wachovia Bank, NA, now owned byWells Fargo Company.  Borrowingsunder the original credit agreement bore interest at a floating rate per annumequal to the one-month London Interbank Offered Rate (“LIBOR”) plus 2.0%.  The original amount of the agreement was$50 million and all amounts payable under this credit agreement wereoriginally due and payable on September 30, 2007.  We have entered into several modificationagreements with the lender to change the principal amount and certain terms andextend the maturity.

 

On April 29, 2010,we modified the agreement to extend the maturity to April 30, 2012, andmodify the interest rate and certain other terms.  The principal amount of the line of creditwas maintained at $40 million.

 

As modified, the loancovenants include a maximum ratio of debt (“Funded Debt”) to net income plusinterest expense, income taxes, depreciation and amortization (“EBITDA”) of 2.0to 1.0 and a minimum fixed charge coverage ratio of 1.5 to 1.0.

 

The floating interestrate per annum on any principal borrowings is the applicable LIBOR rate plus anadditional amount (“Applicable Margin”) determined quarterly based on theFunded Debt to EBITDA ratio calculated on a rolling four quarter basis.  The Applicable Margin will vary from 1.55% to2.75% depending on that ratio.

 

Accrued interest is dueand payable on a monthly basis and all principal is due and payable on April 30,2012.  Until the expiration date, we mayborrow, repay and re-borrow amounts under the terms of the note as long as the 

 

10

----

Tableof Contents

 

total principal balanceoutstanding plus any existing letter of credit obligations does not exceed$40 million.  Additionally, we havegranted Wells Fargo Bank a security interest in all of our property, as definedin the credit agreement.  Since itsinception through the date of this filing, we have not borrowed any amountsunder the credit agreement.  As of March 31,2010, we were in compliance with all of our line of credit covenants.

 

***Legal Proceedings***

 

*ShareholderClass Action and Derivative Actions*

 

On March 10, 2008,the first of ten related class action lawsuits was filed against us and certainof our former and current directors or 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 classcertification, and the allegations include, but are not limited to, allegationsthat the defendants violated the Securities Exchange Act of 1934 and made falseor misleading public statements and/or omissions concerning our business,internal controls, and financial results. The individual class action lawsuits were consolidated on June 10,2008, under the caption *In Re Force Protection, Inc.Securities Litigation*, Action No. 2:08-cv-845-CWH.  On September 29, 2009, the court deniedthe defendants’ motion to dismiss the plaintiffs’ consolidated complaint, andthe parties are engaging in discovery.

 

Between March 27,2008 and May 28, 2008, 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.  Defendants’ motions to dismisseach of the state court derivative actions were denied, and the parties areengaging in discovery.  Four derivativelawsuits pending in the United States District Court for the District of SouthCarolina, 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.

 

*OtherDisputes*

 

We have received a totalof 76 complaints over the last three years from current and former employeesfiled with the United States Equal Employment Opportunity Commission alleging,among other things, race and/or gender discrimination.  We have responded to the complaints as suchresponses have become due, and are investigating the allegations.

 

On June 26, 2009, atemporary independent contractor whose services we had terminated in 2007 fileda complaint 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 of Section 806of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII ofthe 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.

 

Although we intend todefend ourselves in connection with the foregoing legal proceedings and claims,there can be no assurance that we will ultimately prevail in any of thesematters. Moreover, the defense of these claims and proceedings may result insubstantial legal expenses and diversion of our management, and any settlementor adverse judgment may require us to make substantial payments, any of whichcould have a material adverse effect on our business or financial position,results of operations, or cash flows.

 

In addition, compliancewith the directives of the Directorateof Defense Trade Controls (“DDTC”) may result in substantial expensesand diversion of management.  Any failureto adequately address the directives of DDTC could result in civil fines orsuspension or loss of our export privileges, any of which could have a materialadverse effect on our business or financial position, results of operations, orcash flows.

 

We are also a party toother litigation which we 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 or finances.  Other than the litigation described above, weare not aware of any pending or threatened litigation against us that could 

 

11

----

Table of Contents

 

have a material adverseeffect on our business or financial position, results of operations, or cashflows.

 

12

----

Table of Contents

 

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Management’s Discussionand Analysis 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 and theaccompanying notes included in this Quarterly Report on Form 10-Q.  Information in this Item 2 is intended toassist the reader in obtaining an understanding of our unaudited condensedconsolidated financial statements, the changes in certain key items in thosefinancial statements from period to period, the primary factors that accountedfor those changes, and any known trends or uncertainties that we are aware ofthat may have a material effect on our future performance, as well as howcertain accounting principles affect our unaudited condensed consolidatedfinancial statements.  MD&A includesthe following sections:

 

·                  Overview

 

·                  Outlook

 

·                  Results of Operations—an analysis of our consolidatedresults of operations, for the three-month periods presented in our unauditedcondensed consolidated financial statements

 

·                  Liquidity and Capital Resources—an analysis of theeffect of our operating, financing and investing activities on our liquidityand capital resources

 

·                  Off- Balance Sheet Arrangements—a discussion of suchcommitments and arrangements

 

·                  Contractual Obligations—a summary of our aggregatecontractual obligations

 

·                  Critical Accounting Policies and Estimates—adiscussion of accounting policies that require significant judgments andestimates

 

·                  New Accounting Pronouncements—a summary and discussionof our plans for the adoption of new accounting standards relevant to us

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Qcontains both historical and forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended (‘‘Securities Act’’), and Section 21Eof the United States Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical fact included in thisQuarterly Report on Form 10-Q that address activities, events ordevelopments that we expect, believe or anticipate will or may occur in thefuture are forward-looking statements including, in particular, the statementsabout our plans, objectives, strategies and prospects regarding, among otherthings, our financial position, results of operations, cash flows andbusiness.  We have identified some ofthese forward-looking statements with words like “believe”, “may”, “will”, “should”,“expect”, “intend”, “plan”, “predict”, “anticipate”, “outlook”, “estimate” or “continue”and other words and terms of similar meaning. These forward-looking statements include, among other things:

 

·                  Statements regarding the growth of the U.S. and worldmarket for blast- and ballistic-protected vehicles and our survivabilityproducts, services and solutions,

 

·                  Statements regarding the U.S. military’s plans orintentions, including the plans to draw down operations in Iraq and thelong-term plans to remain in Afghanistan,

 

·                  Information regarding the number of various types ofMRAP and other armored vehicles that may be purchased by the U.S. Marine Corps,the U.S. Army and other U.S. and foreign customers under various programs,

 

·                  Statements with respect to our expectations regardingour ability to obtain materials, components and supplies necessary tomanufacture our vehicles, our ability to improve cost efficiencies, including,without limitation, as a result of volume purchasing, improvements in ourmanufacturing process and possible future changes in the efficiencies in ouroperations,

 

·                  Statements regarding any changes in our cost of sales,our general and administrative expenses, our 

 

13

----

Tableof Contents

 

operating resultsor our research and development expenses as a percentage of net sales,

 

·                  Statements regarding our anticipated cash needs,

 

·                  Statements regarding our business strategy, includinggrowing a balanced diverse revenue and earnings,

 

·                  Statements regarding the revenues that may be derivedfrom, and the quantities of vehicles, products and services that may bepurchased or ordered pursuant to, existing or possible future contracts ororders by various customers, including statements regarding the estimated valueof those orders and contracts and statements about the amount of vehicles inour backlog,

 

·                  Statements regarding our expectations regardingcontract awards, including opportunities for the sales of our Ocelot and JAMMAvehicles,

 

·                  Statements regarding the effects of rebalancing ourworkforce and manufacturing capacities,

 

·                  Statements regarding the benefits that may be realizedfrom our joint ventures, teaming arrangements and any new ventures or businessdeveloped pursuant to them, and

 

·                  Statements regarding our ability to utilize netoperating loss carryforwards for income tax purposes and the effect of ourincome tax positions on our effective tax rate.

 

When used in thisQuarterly Report on Form 10-Q, except as specifically noted otherwise, theterm “Force Protection, Inc.” refers to Force Protection, Inc. only,and references to the terms “Company,” “we,” “our,” “ours” and “us” referto Force Protection, Inc. and its consolidated subsidiaries.

 

**Overview**

 

Force Protection, Inc.provides survivability solutions to support the armed forces of the UnitedStates and its allies which are in harm’s way. We design, manufacture, test, deliver and support our blast- andballistic-protected products to increase the survivability of the users of ourproducts.  Our specialty vehicles, whichwe believe are at the forefront of blast- and ballistic-protected technology,are designed to protect their occupants from landmines, hostile fire, andimprovised explosive devices (“IEDs”). We are a key provider of the U.S. military’s Mine Resistant AmbushProtected (“MRAP”) vehicle program and have sold and delivered over 3,000vehicles under this program.  We alsoprovide our Cougar and Buffalo mine-protected vehicles to several foreigncustomers, including the U.K. Ministry of Defence which has purchased threevariants of our Cougar vehicle. Complementing these efforts, we are designing, developing and marketingnew vehicle platforms (including the Ocelot and the Joint All-Terrain ModularMobility Asset (“JAMMA”)) that provide increased modularity, speed, mobilityand concealment with enhanced levels of blast- and ballistic-protection.  Across all vehicle programs we have soldapproximately 4,500 vehicles since 2005. Supporting our vehicle design, development and production initiatives,we develop, manufacture, test, deliver and support products and services aimedat further enhancing the survivability of our users against additionalthreats.  Capitalizing on our strengthsin survivability 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.

 

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. government.  We attempt to alignour workforce to satisfy our business requirements.

 

We are headquartered, andhave leased manufacturing facilities, in Ladson, South Carolina.  We have office space in Sterling Heights,Michigan; Edgefield, South Carolina; North Charleston, South Carolina;Arlington, Virginia; Bristol, United Kingdom; and Leamington Spa, UnitedKingdom.  We conduct our blast range,research and development activities and customer training requirements atproperties located in Edgefield, South Carolina; Summerville, South Carolina;and Roxboro, North Carolina.  We alsohave a vehicle support facility in Kuwait, and 

 

14

----

Table of Contents

 

provide militaryoperations support in Afghanistan and Iraq.

 

**Outlook**

 

The global war onterrorism, especially in Iraq and Afghanistan, has confirmed that IEDs,landmines, explosively-formed projectiles and rocket-propelled grenades pose asignificant threat 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 will take most of 2010to achieve and additional MRAPs from original equipment manufacturers (“OEMs”)may be required to support operations. Landmines and IEDs have been used extensively by terrorists andinsurgent groups in Iraq and other areas because of their highly effectivenature and relatively low cost.  In 2009,U.S. forces began drawing down from Iraq. The long-term commitment of U.S. forces in Iraq and Afghanistan isuncertain.  Consequently, U.S. andinternational military departments are in the process of determining long-termroles for MRAPs.  The future requirementsfor long-term life cycle logistics plans, as well as an important effort toreset and recapitalize vehicles that come out of theater, are beingdetermined.  MRAPs can be placed intopermanent military organizations for convoy security, route clearance,explosive ordnance disposal and casualty evacuation, or be placed intoprepositioned storage roles for regional response, or be sold to foreignmilitary customers.

 

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

 

·                  A reduction of combat forces and our vehicles in Iraq,which will significantly reduce the operational tempo placed on our fleet*,*as well as the requirement for our field servicerepresentatives resourced to support units in that theater,

 

·                  Conversely, there is growth of military forces, our vehicles and all MRAPs inAfghanistan, which is necessitating changes to our vehicles and is increasingsustainment/maintenance requirements. Our current customersare developing modernization and sustainment plans for our fielded fleet ofvehicles and we will have to compete for the spares and sustainment supportbusiness for our fielded fleet of vehicles,

 

·                  Uncertainty indefense spending, due to the current administration’s defense strategy, as wellas the dynamic macroeconomic and geopolitical conditions,

 

·                  Challenges with the expansion of our customers,products and services both domestically and internationally.  We will continue to try to capture contractawards for our products and services in a volatile marketplace,

 

·                  Establishing long-term programs to include upgrades,remanufacture, and sustainment for our fleet of vehicles, and then expand thiscapability to sustaining all MRAPs universally,

 

·                  Developing new products and services to bring tomarket, and

 

·                  Rationalizing our cost structure 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 high through 2011.  The 30,000troops’ surge of force in Afghanistan is expected take most of 2010 to achieveand additional MRAPs are expected to be required to support operations in thistheater.  However, U.S. forces arecurrently drawing down from Iraq and many MRAPs are being transferred from Iraqto Afghanistan.  The U.S. and foreign militarydepartments are determining the current and future roles for MRAP vehicles. We expect a large number of our currently deployed vehicles will remain inservice or be pre-positioned for rapid deployment.  These vehicles willlikely require an overhaul and modification to remain in optimal combatreadiness.  We will leverage our manufacturing skills and field servicesto support our customers in maintaining readiness for these highly valuedassets.  Although much of this work will involve large depot facilities,the magnitude of work could exceed our capacity and require partnerships tocomplete work on schedule.

 

We intend to maintain andexpand our current business as a leading supplier of survivability solutions, 

 

15

----

Table of Contents

 

including protectedvehicles, total life cycle support and other services, to the U.S. Departmentof Defense, other U.S. government agencies, foreign governments, and domesticand international commercial customers. Our strategy is focused on growing balanced diverse revenue and earningsthrough organic growth, cost containment, and selected investments,partnerships and acquisitions, enabling us to grow the Company.  Specific components of the strategy includethe following:

 

·                  Building on our base business to enablefuture success, including improving performance on contracts and improving ourcost structure,

 

·                  Capitalizing on and extending our currentbusiness, including growing sales organically by investing in research anddevelopment and introducing new products within our core capabilities of blast-and ballistic-protection,

 

·                  Building on our core capabilities,continuing to ensure a leadership position by delivering innovativesurvivability solutions to market, including investing in new technologies, and

 

·                  Growing profitably through meaningfulacquisitions, partnerships and investments to engage in a broader range ofproducts, customers and markets.

 

Aswe discussed in Item 4,  *Controlsand Procedures*, of this Quarterly Report on Form 10-Q, we believe that effective disclosure controlsand procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) underthe Exchange Act) are in place as of March 31,2010.  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 Events*

 

On March 8, 2010, wewere awarded a contract modification under our MRAP contract with the U.S.Marine Corps Systems Command to extend the performance of 216 field servicerepresentatives and associated support for the Independent Suspension System (“ISS”)installations on the Cougar MRAP vehicles at the MRAP Sustainment Facility inKuwait.  The contract modification has avalue not to exceed $26.1 million and is subject to definitization.

 

On April 2, 2010, wewere awarded a contract modification under our MRAP contract with the U.S.Marine Corps Systems Command for 755 ISS kits for Cougar MRAP vehicles.  The contract modification has a value not toexceed $82.3 million and is subject to definitization.

 

**Resultsof Operations**

 

The following discussionand analysis is based on our unaudited condensed consolidated statements ofoperations, which reflect our results of operations for the three-month periodsended March 31, 2010 and 2009 as prepared in accordance with generallyaccepted accounting principles in the United States of America (“GAAP”).

 

***Comparison of Results of Operations for the Three MonthsEnded March 31, 2010 and 2009***

 

The following tablepresents our results of operations for the three-month periods ended March 31,2010 and 2009 as well as the percentage change from year to year.

 

16

----

Tableof Contents

 
| ** **                           | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **(in thousands)**                   | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **Change** | ** ** |
| Net sales                            |       | $                                             | 134,847    |   | $ | 184,734 |   | -27 | % |
| Cost  of sales                       |       | 109,458                                       |       | 147,832 |   | -26 | % |
| Gross profit                         |       | 25,389                                        |       | 36,902 |   | -31 | % |
| General  and administrative expenses |       | 18,740                                        |       | 20,851 |   | -10 | % |
| Research and development expenses    |       | 4,847                                         |       | 4,605 |   | 5 | % |
| Operating  income                    |       | 1,802                                         |       | 11,446 |   | -84 | % |
| Other income (expense), net          |       | 73                                            |       | (62 | ) | -218 | % |
| Interest  expense, net               |       | (132                                          | )          | (136 | ) | -3 | % |
| Income before income tax expense     |       | 1,743                                         |       | 11,248 |   | -85 | % |
| Income  tax expense                  |       | (607                                          | )          | (3,872 | ) | -84 | % |
| Net income                           |       | $                                             | 1,136      |   | $ | 7,376 |   | -85 | % |

 

*Unitssold*

 

The following tablepresents our vehicle unit sales for the three-month periods ended March 31,2010 and 2009 as well as the percentage change from year to year.

 
| ** **                  | ** ** | **For the three months ended March 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **Units  Sold**             | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **Change** | ** ** |
| Buffalo                     |       | 22                                            |       | 12 |   | 83 | % |
| Cougar MRAP (Competitive)   |       | —                                        |       | 5 |   | -100 | % |
| Mastiff                     |       | 16                                            |       | 16 |   | 0 | % |
| Ridgback                    |       | —                                        |       | 83 |   | -100 | % |
| Cougar (all other variants) |       | 4                                             |       | 18 |   | -78 | % |
| Cheetah                     |       | —                                        |       | 2 |   | -100 | % |
| Total                       |       | 42                                            |       | 136 |   | -69 | % |

 

*Netsales*

 

The decrease in net salesfrom the comparative period is attributable to a decrease in the volume ofvehicle deliveries and spares and sustainment sales, including field servicerepresentatives, training, Iraqi Light Armored Vehicle (“ILAV”) subcontractorrevenues and technical publications; partially offset by an increase in salesresulting from modernization efforts, which include the supply and installationof ISS kits for our Cougar vehicles.  Thespares and sustainment sales change primarily results from a decrease in demandfor MRAP spare parts.  The sales mix ofvehicles delivered, modernization efforts, and spares and sustainment, and thepercentage change in the comparative periods are set forth in the followingtable:

 
| ** **                  | ** ** | **For the three months ended March 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **(in  thousands)**         | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **Change** | ** ** |
| Buffalo                     |       | $                                             | 23,362     |   | $ | 10,800 |   | 116 | % |
| Cougar MRAP (Competitive)   |       | —                                        |       | 4,029 |   | -100 | % |
| Mastiff                     |       | 10,636                                        |       | 6,752 |   | 58 | % |
| Ridgback                    |       | —                                        |       | 31,119 |   | -100 | % |
| Cougar (all other variants) |       | 2,899                                         |       | 13,722 |   | -79 | % |
| Cheetah                     |       | —                                        |       | 1,000 |   | -100 | % |
| Modernization               |       | 48,165                                        |       | — |   | n/m |   |
| Spares and sustainment      |       | 49,785                                        |       | 117,312 |   | -58 | % |
| Total                       |       | $                                             | 134,847    |   | $ | 184,734 |   | -27 | % |

 

----

n/m—not meaningful

 

17

----

Tableof Contents

 

*Cost ofsales and Gross profit*

 
| ** **                                 | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                    | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Cost of sales                              |       | $                                             | 109,458    |   | $ | 147,832 |   |
| Gross profit                               |       | $                                             | 25,389     |   | $ | 36,902 |   |
| Gross profit as a percentage of  net sales |       | 18.8                                          | %          | 20.0 | % |

 

The gross profitpercentage decreased for the three months ended March 31, 2010, over thecomparable 2009 period, primarily due to manufacturing-related costs associatedwith fewer vehicles produced and, to a lesser extent, lower pricing on alimited number of Buffalo vehicles sold during 2010 compared to 2009.

 

*General and administrative expenses*

 
| ** **                           | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| **(in  thousands)**                  | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| General and administrative  expenses |       | $                                             | 18,740     |   | $ | 20,851 |   |
| As a percentage of net sales         |       | 13.9                                          | %          | 11.3 | % |
|                                      |            |                                               |            |  |  |  |  |

 

General and administrative expenses decreased $2.1million for the three months ended March 31, 2010, from the comparable2009 period.  This decrease is primarilydue to $3.2 million of 2006 re-audit costs incurred during the first quarter of2009 and lower legal fees ($1.2 million), partially offset by increased costsfor business development ($1.4 million), depreciation ($0.7 million), Europeanoperations ($0.6 million) and severance ($0.3 million).  All other general and administrativeexpenses, net, decreased $0.7 million in 2010 compared to 2009.

 

*Researchand development expenses*

* *
| ** **                         | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|
| **(in  thousands)**                | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Research and development  expenses |       | $                                             | 4,847      |   | $ | 4,605 |   |
| As a percentage of net sales       |       | 3.6                                           | %          | 2.5 | % |
|                                    |            |                                               |            |  |  |  |  |

 

Research and developmentexpenses as a percentage of net sales increased by 1.1 percentage points in thethree months ended March 31, 2010, over the comparable period in 2009,primarily due to the decrease in net sales. Total expenses were substantially unchanged compared to the prior yearas an increased level of expenditures on the Ocelot and other developmentefforts in 2010 approximately replaced spending on prototypes for the MRAP AllTerrain Vehicle (“M-ATV”) in 2009.

 

*Otherincome (expense), net*

* *
| ** **                   | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| **(in  thousands)**          | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Other income (expense), net  |       | $                                             | 73         |   | $ | (62 | ) |
| As a percentage of net sales |       | 0.1                                           | %          | 0.0 | % |
|                              |            |                                               |            |  |  |  |  |

 

Other income increased inthe three months ended March 31, 2010, as compared to the same period for2009, primarily due to break-even results on our IST joint venture in 2010compared to a $0.2 million loss for the same period in 2009.  See Note 1, *Organizationand Description of the Business*, in the accompanying unauditedcondensed consolidated financial statements. This difference was partially offset by lower interest income as aresult of decreased interest rates for the three months ended March 31,2010 compared to 2009.

 

18

----

Tableof Contents

 

*Interest expense, net*

 
| ** **                   | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| **(in  thousands)**          | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Interest expense, net        |       | $                                             | 132        |   | $ | 136 |   |
| As a percentage of net sales |       | 0.1                                           | %          | 0.1 | % |
|                              |            |                                               |            |  |  |  |  |

 

Interest expense was substantially unchanged for thethree months ended March 31, 2010, as compared to the same period for2009.

 

*Incometax expense*

 
| ** **                   | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| **(in  thousands)**          | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Income tax expense           |       | $                                             | 607        |   | $ | 3,872 |   |
| As a percentage of net sales |       | 0.5                                           | %          | 2.1 | % |
|                              |            |                                               |            |  |  |  |  |

 

Income tax expensedecreased $3.3 million for the three months ended March 31, 2010, from thecomparable 2009 period primarily because of lower profits resulting fromreduced sales volumes.  The effectiveincome tax expense rates for the three months ended March 31, 2010 and2009 were approximately 34.8% and 34.4%, respectively.  See Note 5,*Income Taxes*, in the accompanying unaudited condensed consolidatedfinancial statements.

 

*Netincome*

 
| ** **                 | ** ** | **For the three months ended March 31,** | ** ** |
|----------------------------|------------|-----------------------------------------------|------------|
| **(in  thousands)**        | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Net income                 |       | $                                             | 1,136      |   | $ | 7,376 |   |
| Diluted earnings per share |       | $                                             | 0.02       |   | $ | 0.11 |   |

 

Net income for the threemonths ended March 31, 2010 decreased compared to the same period for 2009primarily due to a decrease in profits resulting from reduced sales volume.

 

*Backlog*

 

The following table setsforth the number of vehicles included in our backlog as of March 31, 2010and 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 you that we will deliver orsell all of the vehicles included in our backlog. See Part I, Item 1A,Risk Factors, included in our Annual Report on Form 10-K for the yearended December 31, 2009.

 
| ** **                  | ** ** | **Vehicle Funded Backlog** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **as of March 31,**   | ** ** |
| ** **                  | ** ** | **2010**                   | ** ** | **2009** | ** ** |
| Buffalo                     |       | 34                         |       | 68 |   |
| Cougar MRAP (Competitive)*  |       | —                     |       | 4 |   |
| Mastiff                     |       | 7                          |       | 8 |   |
| Cougar (all other variants) |       | —                     |       | 10 |   |
| Total                       |       | 41                         |       | 90 |   |

 

----

*  Refers to Cougar vehicles manufactured underthe MRAP Subcontract pursuant to which we and General Dynamics Land Systems (“GDLS”)fulfill the MRAP Competitive Contract.

 

On May 3, 2010, we received a sub-contractmodification from our joint venture, IST, for the delivery of 28 Wolfhoundvehicles in connection with a contract modification awarded to IST by the U.K.MoD. The value of our sub-contract modification is approximately $14.2 million,which is subject to definitization.

 

On May 4, 2010, we received a contract from the U.S.Marine Corps Systems Command under the Foreign Military Sales program for thedelivery of 30 Cougar vehicles, spare parts, training and field services. Thecontract has an approximate value of $24 million, a portion of which is subjectto definitization.

 

**Liquidityand Capital Resources**

 

Our liquidity andavailable capital resources are impacted by operating, financing and investingactivities.  Our 

 

19

----

Tableof Contents

 

principal sources ofliquidity are cash on hand and cash from operations, primarily from the UnitedStates government.

 

*Sourcesand Uses of Cash*

 

During the past severalyears, our cash requirements have been met primarily through cash flow providedby operations; and our funds have been used primarily to fund working capitalrequirements and make capital expenditures. The following chart shows the cash flows provided by or used inoperating, investing, and financing activities for the three months ended March 31,2010 and 2009:

 
| ** **                                           | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                   | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Net cash (used in) provided by  operating activities |       | $                                             | (10,541    | ) | $ | 14,153 |   |
| Net cash used in investing activities                |       | (2,565                                        | )          | (5,211 | ) |
| Net cash provided by (used in)  financing activities |       | 30                                            |       | (113 | ) |
| Effect of exchange rate changes on cash              |       | (75                                           | )          | — |   |
| (Decrease) increase in cash and  cash equivalents    |       | $                                             | (13,151    | ) | $ | 8,829 |   |

 

As of March 31,2010, we had $134.1 million of cash and cash equivalents, a decrease from$147.3 million as of December 31, 2009, and an increase from $119.8million at March 31, 2009.

 

*CashFlows from Operating Activities*

 

Cash flows from operatingactivities decreased by $24.7 million during the first three months of 2010compared with the first three months of 2009. The decrease resulted from a reduction in net income and unfavorable netchanges in operating assets and liabilities during the first quarter of 2010compared to the same period for 2009.

 

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

 

Increases to *Cash Flows from Operating Activities*:

 

·                  a decrease in accounts receivable of $7.2 millionprimarily resulting from (a) lower net sales during the three months endedMarch 31, 2010 compared to the three months ended December 31, 2009,partially offset by (b) an increase in the earned and unbilled accountsreceivable balance due to increased sales under not-to-exceed undefinitizedcontracts, whereby we cannot fully bill until the contracts are definitizedalthough the products have been delivered, and

 

·                  an increase in advance payments on contracts of $2.5million primarily resulting from customer payments received on our contract forISS kits.

 

Decreases to *Cash Flows from Operating Activities*:

 

·                  a decrease in accounts payable of $19.1 millionresulting primarily from  (a) anincrease in payments to suppliers relating to ISS program procurement,including kit purchases and system installations, resulting in decreasedobligations at March 31, 2010 compared to December 31, 2009 and (b) thetiming of other purchases and related payments,

 

·                  a net increase in inventories of $4.4 million(excluding inventory cost write-downs to estimated net realizable value)resulting primarily from  increasedfinished goods and work in process inventory for tactical support vehicles,partially offset by a reduction in the level of raw material inventories, and

 

·                  a decrease in other liabilities of $3.6 millionprimarily due to a decrease in income taxes payable and compensation-relatedliabilities resulting from payments made during the first quarter of 2010.

 

*CashFlows from Investing Activities*

 

Cash used in investingactivities decreased by $2.6 million during the first three months of 2010compared with the first three months of 2009 primarily due to reduced capitalexpenditures and a $2.1 million investment in IST, our joint venture with NPAerospace (“NPA”) made during the first quarter of 2009.

 

20

----

Tableof Contents

 

*CashFlows from Financing Activities*

 

Cash flows fromfinancing activities were relatively flat during the first three months of 2010compared with the first three months of 2009 due to minimal stock optionexercises and a minimal change in other long-term liabilities.

 

*CurrentLiquidity and Capital Resources*

 

Our cash and cashequivalents as of March 31, 2010 were held for working capital purposesand were invested primarily in short-term United States Treasury bills andmoney market funds.  We do not enter intoinvestments 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 three months of 2010, capital expenditures were $2.6 million.  We do not expect any significant changes tocapital expenditures in 2010 as compared to 2009.

 

The amount of capitalthat we will require depends on several factors, including without limitation,the extent 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 flow willbe sufficient to meet our presently budgeted capital expenditures and our otherpresently 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.  We may need to obtain additionalsources of capital to meet our future cash needs, which may include borrowingsor the issuance of debt or equity securities, including common stock, and therecan be no assurance that such financing will be available to us when we need itor, if available, that the terms of any such financing will be satisfactory tous and not dilutive to our shareholders. Any failure to obtain necessary capital as and when required could havea material adverse effect on our business, prospects, financial position,results of operations and cash flows.

 

**Off-BalanceSheet Arrangements**

 

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

 

·                  any obligation under certain guaranteesor contracts,

 

·                  a retained or contingent interest inassets transferred to an unconsolidated entity or similar entity or similararrangement that serves as credit, liquidity, or market risk support to thatentity for such assets,

 

·                  any obligation under certain derivativeinstruments, and

 

·                  any obligation under a material variableinterest held by the registrant in an unconsolidated entity that providesfinancing, liquidity, market risk, or credit risk support to the registrant, orengages in leasing, hedging, or research and development services with theregistrant.

 

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

 

As of March 31,2010, we did not have any obligation under certain guarantees or contracts asdefined above.

 

As of March 31,2010, we did not have any retained or contingent interest in assets as definedabove.

 

As of March 31,2010, we did not hold derivative financial instruments, as defined by FASBAccounting Standards Codification Topic 815, “*Derivativesand Hedging*.”

 

As of March 31,2010, 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 

 

21

----

Tableof Contents

 

contractually narrow orlimited purposes.  As of March 31,2010 and December 31, 2009, we were not involved in any unconsolidated SPEtransactions.

 

**ContractualObligations**

 

We have futureobligations under various contracts relating to debt and interest payments,operating leases, and purchase obligations.  During the three months endedMarch 31, 2010, there were no significant changes to these obligations asreported in our Annual Report on Form 10-K for the year ended December 31,2009, except that our purchase obligations increased to $84.9 million as of March 31,2010, from $68.2 million as of December 31, 2009.  The increase in purchase obligations as of March 31,2010 was primarily due to new purchase orders related to modernization salesorders (ISS kits and installation services).

 

**CriticalAccounting Policies and Estimates**

 

For the quarterly periodended March 31, 2010, there were no significant changes in criticalaccounting policies and estimates from those disclosed in our Annual Report on Form 10-Kfor 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.

 

**Item3. 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, the cost of our productscould increase. It is unlikely we will be able to pass on this cost under ourcurrent contracts.  As a result, if thecost of our raw materials increases, our profitability, if any, could decrease.

 

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

 

**ForeignCurrency**

 

The majority of ourbusiness is denominated in U.S. dollars and as such, movement in the foreigncurrency markets will have a minimal direct impact on our business.

 

**InterestRates**

 

We do not have a tradingportfolio and although our current financing arrangement is at a variable rate,we do not have any borrowings under the arrangement.  As a result, wecurrently are not directly at risk of interest rate fluctuations. As ourfinancing needs change in the future, interest rate risk may become a moresignificant issue for us.

 

Currently, we do not useany derivative financial instruments for the purpose of reducing our exposureto adverse fluctuations in interest rates, foreign currency exchange, orcommodity prices.  We are not a party toleveraged derivatives nor do we hold or issue financial investments forspeculative purposes.

 

22

----

Tableof Contents

 

**Item 4. Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

Disclosure controls and procedures are controls andother procedures that are designed to provide reasonable assurance that theinformation required to be disclosed in reports filed or submitted under theExchange Act, is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the SEC and accumulatedand communicated to management, including the chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

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 March 31,2010.  Based on this evaluation, ourchief executive officer and chief financial officer concluded that, as of March 31,2010, Force Protection’s disclosure controls and procedures were effective.

 

**Changes in Internal Control overFinancial Reporting**

 

There were no changes inour internal control over financial reporting (as defined in Rule 13a-15(f) andRule 15d-15(f) under the Exchange Act) that occurred during thequarter ended March 31, 2010, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

The effectiveness ofForce Protection’s or any system of disclosure controls and procedures andinternal control over financial reporting is subject to certain limitations,including the exercise of judgment in designing, implementing, and evaluatingthe controls and procedures, the assumptions used in identifying the likelihoodof future 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.

 

**PART II.OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

**ShareholderClass Action and Derivative Actions**

 

On March 10, 2008,the first of ten related class action lawsuits was filed against us and certainof our former and current directors or 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 classcertification, and the allegations include, but are not limited to, allegationsthat the defendants violated the Securities Exchange Act of 1934 and made falseor misleading public statements and/or omissions concerning our business,internal controls, and financial results. The individual class action lawsuits were consolidated on June 10,2008, under the caption *In Re Force Protection, Inc.Securities Litigation*, Action No. 2:08-cv-845-CWH.  On September 29, 2009, the court deniedthe defendants’ motion to dismiss the plaintiffs’ consolidated complaint, andthe parties are engaging in discovery.

 

Between March 27,2008 and May 28, 2008, 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.  Defendants’ motions to dismisseach of the state court derivative actions were denied, and the parties areengaging in discovery.  Four derivativelawsuits pending in the United States District Court for the District of SouthCarolina, 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. 

 

23

----

Tableof Contents

 

**OtherDisputes**

 

We have received a totalof 76 complaints over the last three years from current and former employeesfiled with the United States Equal Employment Opportunity Commission alleging,among other things, race and/or gender discrimination.  We have responded to the complaints as suchresponses have become due, and are investigating the allegations.

 

On June 26, 2009, atemporary independent contractor whose services we had terminated in 2007 fileda complaint 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 of Section 806of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII ofthe 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.

 

Although we intend todefend ourselves in connection with the foregoing legal proceedings and claims,there can be no assurance that we will ultimately prevail in any of thesematters. Moreover, the defense of these claims and proceedings may result insubstantial legal expenses and diversion of our management, and any settlementor adverse judgment may require us to make substantial payments, any of whichcould have a material adverse effect on our business or financial position,results of operations, or cash flows.

 

In addition, compliancewith the directives of the Directorateof Defense Trade Controls (“DDTC”) may result in substantial expensesand diversion of management.  Any failureto adequately address the directives of DDTC could result in civil fines orsuspension or loss of our export privileges, any of which could have a materialadverse effect on our business or financial position, results of operations, orcash flows.

 

We are also a party toother litigation which we 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.

 

**Item1A. Risk Factors**

 

In addition to the riskfactor set forth below and other information set forth in this Quarterly Reporton Form 10-Q, you should carefully consider the risk factors discussed in Part I,“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2009 filed with the SEC on March 8, 2010, whichcould materially affect our business, financial condition or future results.The risks described in our Annual Report on Form 10-K and as describedbelow 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-pricecontract, we receive only the amount indicated in the contract, regardless ofthe actual cost to produce the goods.  While firm fixed-price contractsallow us to benefit from potential cost savings, they also expose us to therisk of cost overruns.  Also, many of the contracts we  receive fromthe U.S. military  are sole source with a “not to exceed” amount andare subject to “definitization,” meaning that the contract price is not agreedupon at contract inception.  If the estimates we use to calculate thecontract price are incorrect, the cost to perform the work proves  tobe greater than the price, or the definitized contract price is less than thecost, we could incur losses.  In addition, some of our contracts havespecific provisions relating to schedule and performance, which may result inpenalties for failure to perform.  Accordingly, there can be no assurancethat the actual  prices we receive under contracts will not besubstantially less than our estimates or costs, which would adverselyaffect  our cash flows, our operating results and could resultin losses.

 

**We maymake acquisitions**,**which may poserisks to our business 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 asanticipated and that the technologies acquired do not prove to be those neededto be successful in those markets; the risk that we pay a purchase price thatexceeds what the future results of operations would have merited; and thepotential loss 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.

 

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

24

----

Table of Contents

 

**Item3. Defaults Upon Senior Securities**

 

None.

 

**Item4. (Removed and Reserved)**

 

**Item5. Other Information**

 

None.

 

**Item6. Exhibits**

 

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

 

**EXHIBIT INDEX**

 

In reviewing theagreements included as exhibits to this Quarterly Report on Form 10-Q,investors are reminded that they are included to provide you with informationregarding their terms and are not intended to provide any other factual ordisclosure information about Force Protection or the other parties to theagreements.  Some of the agreementscontain representations and warranties by each of the parties to the applicableagreement.  These representations andwarranties have been made solely for the benefit of the other parties to theapplicable agreement and:

 

· Should not in all instances be treatedas categorical statements of fact, but rather as a way of allocating the riskto one of the parties if those statements prove to be inaccurate,

 

· Have been qualified by the disclosuresthat were made to the other party in connection with the negotiation of theapplicable agreement, which disclosures are not necessarily reflected in theagreement,

 

· May apply standards of materialityin a way that is different from what may be viewed as material to you or otherinvestors, and

 

· Were made only as of the date of theapplicable agreement or such other date or dates may be specified in theagreement and are subject to more recent developments.

 

Accordingly, therepresentations and warranties may not describe the actual state of affairs asof the date they were made or at any other time.  Additional information about Force Protection, Inc.may be found elsewhere in this Quarterly Report on Form 10-Q and ForceProtection’s other public filings, which are available without charge on ForceProtection, 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. |

 

25

----

Tableof Contents

 
| 10.1   |   | 2010 Executive  Short-Term Incentive Program, dated as of January 18, 2010. † **                                                                                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                       |
| 10.2   |   | Amendment of  Solicitation/Modification of Contract under Contract  No. M67854-07-D-5031-0012 with the United States Marine Corps Systems  Command, dated March 8, 2010. † *                |
|   |   |                                                                                                                                                                                                       |
| 14.1   |   | Force  Protection, Inc. Code of Conduct and Ethics, filed as Exhibit 14.1  to the Company’s Current Report on Form 8-K filed March 5, 2010, is  hereby incorporated by reference. |
|   |   |                                                                                                                                                                                                       |
| 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. †                                                     |

 

----

(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.)

 

(Exhibits marked with anasterisk (**) are a management contract or compensatory plan required to befiled as an Exhibit to this Quarterly Report on Form 10-Q.)

 

26

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                   | **FORCE  PROTECTION, INC.***(Registrant)* |
|------------------------|-------------------------------------------|
| ** **             | ** **                                |
| ** **             | ** **                                |
| Date: May 4, 2010 | By:                                       | /s/ MICHAEL MOODY |
| ** **             | ** **                                | **Name:** | **Michael  Moody** |
| ** **             | ** **                                | **Title:** | **Chairman,  Chief Executive Officer and**** President (principal executive officer)** |
| ** **             |                                      |
| ** **             |                                      |   |
| ** **             |                                      |   |
| Date: May 4, 2010 | By:                                       | /s/ CHARLES MATHIS |
| ** **             | ** **                                | **Name:** | **Charles  Mathis** |
| ** **             | ** **                                | **Title:** | **Chief  Financial Officer (principal financial and accounting officer)** |
| ** **             | ** **                                | ** ** |

 

27

----