Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

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

 

**Forthe quarterly period ended June 30, 2009**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(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(Do not check if a  smaller reporting company) |   | Smaller  reporting company  o |

 

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 had69,908,996 shares of common stock outstanding as of August 6, 2009.

 

 

 

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TABLE OF CONTENTS

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

 

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** **

**PART I.FINANCIAL STATEMENTS**

 

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

** **

**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

** **
| ** **                                           | ** ** | **As of  June 30,** | ** ** | **As of  December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **2009**                 | ** ** | **2008**                     | ** ** |
| ** **                                           | ** ** | **(In  Thousands)**      | ** ** |
| **Assets**                                           |       |                     |       |                         |       |
| **Current  assets:**                                 |       |                     |       |                         |       |
| Cash and cash equivalents                            |       | $                        | 111,815    |                         | $          | 111,001 |   |
| Marketable securities                                |       | 9,985                    |       | —                       |       |
| Accounts receivable, net                             |       | 114,131                  |       | 138,449                      |       |
| Inventories                                          |       | 139,879                  |       | 88,502                       |       |
| Advances to subcontractor                            |       | 26,027                   |       | —                       |       |
| Deferred income tax assets                           |       | 14,274                   |       | 15,572                       |       |
| Prepaid income taxes                                 |       | 8,893                    |       | —                       |       |
| Other current assets                                 |       | 3,145                    |       | 2,417                        |       |
| Total current assets                                 |       | 428,149                  |       | 355,941                      |       |
| Property and equipment,  net                         |       | 60,001                   |       | 61,429                       |       |
| Investment in joint  venture                         |       | 1,937                    |       | —                       |       |
| Intangible assets, net                               |       | 403                      |       | 654                          |       |
| **Total  assets**                                    |       | $                        | 490,490    |                         | $          | 418,024 |   |
|                                                 |       |                     |       |                         |       |
| **Liabilities and Shareholders’ Equity**        |       |                     |       |                         |       |
| **Current  liabilities:**                            |       |                     |       |                         |       |
| Accounts payable                                     |       | $                        | 84,754     |                         | $          | 47,115 |   |
| Due to United States  government                     |       | 53,619                   |       | 39,015                       |       |
| Advance payments on  contracts                       |       | 48,561                   |       | 29,504                       |       |
| Other current liabilities                            |       | 11,929                   |       | 20,783                       |       |
| Total current liabilities                            |       | 198,863                  |       | 136,417                      |       |
| Deferred income tax  liabilities                     |       | 3,996                    |       | 3,141                        |       |
| Other long-term  liabilities                         |       | —                   |       | 139                          |       |
|                                                 |       | 202,859                  |       | 139,697                      |       |
| Commitments and  contingencies                       |       |                     |       |                         |       |
|                                                 |       |                     |       |                         |       |
| **Shareholders’  equity:**                      |       |                     |       |                         |       |
| Common stock                                         |       | 69                       |       | 68                           |       |
| Additional paid-in capital                           |       | 258,236                  |       | 256,939                      |       |
| Accumulated other  comprehensive income              |       | 189                      |       | —                       |       |
| Retained earnings                                    |       | 29,137                   |       | 21,320                       |       |
| Total shareholders’ equity                      |       | 287,631                  |       | 278,327                      |       |
| **Total  liabilities and shareholders’ equity** |       | $                        | 490,490    |                         | $          | 418,024 |   |

 

The accompanyingnotes to condensed consolidated financial statements

are an integralpart of these statements.

 

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**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                       | ** ** | **For the  three months ended**            | ** ** | **For the  six months ended**              | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                          | ** ** | **June 30,**                          | ** ** |
| ** **                                       | ** ** | **2009**                                   | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(In  Thousands, Except Per Share Data)** | ** ** | **(In  Thousands, Except Per Share Data)** | ** ** |
| Net sales                                        |       | $                                          | 187,116    |                                       | $          | 340,917 |   | $ | 371,850 |   | $ | 743,964 |   |
| Cost of sales                                    |       | 161,403                                    |       | 303,566                                    |       | 309,235 |   | 668,282 |   |
| Gross profit                                     |       | 25,713                                     |       | 37,351                                     |       | 62,615 |   | 75,682 |   |
| General and administrative  expenses             |       | 20,172                                     |       | 21,525                                     |       | 41,023 |   | 46,150 |   |
| Research and development  expenses               |       | 4,892                                      |       | 3,039                                      |       | 9,497 |   | 5,899 |   |
| Operating income                                 |       | 649                                        |       | 12,787                                     |       | 12,095 |   | 23,633 |   |
| Other income (expense),  net                     |       | (133                                       | )          | 460                                        |       | (195 | ) | 971 |   |
| Interest income (expense),  net                  |       | 103                                        |       | (98                                        | )          | (33 | ) | (223 | ) |
| Income before income tax  expense                |       | 619                                        |       | 13,149                                     |       | 11,867 |   | 24,381 |   |
| Income tax expense                               |       | (178                                       | )          | (4,882                                     | )          | (4,050 | ) | (9,077 | ) |
| Net income                                       |       | $                                          | 441        |                                       | $          | 8,267 |   | $ | 7,817 |   | $ | 15,304 |   |
| **Earnings  per common share:**                  |       |                                       |       |                                       |       |   |   |   |   |
| Basic                                            |       | $                                          | 0.01       |                                       | $          | 0.12 |   | $ | 0.11 |   | $ | 0.22 |   |
| Diluted                                          |       | $                                          | 0.01       |                                       | $          | 0.12 |   | $ | 0.11 |   | $ | 0.22 |   |
| **Weighted  average common shares outstanding:** |       |                                       |       |                                       |       |   |   |   |   |
| Basic                                            |       | 68,425                                     |       | 68,311                                     |       | 68,416 |   | 68,304 |   |
| Diluted                                          |       | 68,979                                     |       | 68,372                                     |       | 68,909 |   | 68,368 |   |

 

The accompanyingnotes to condensed consolidated financial statements

are an integralpart of these statements.

 

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**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **For the six  months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                                                                              | ** ** | **(In  Thousands)**                         | ** ** |
| **Cash flows  from operating activities:**                                                              |       |                                        |       |   |   |
| Net income                                                                                              |       | $                                           | 7,817      |   | $ | 15,304 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities — |       |                                        |       |   |   |
| Depreciation and  amortization                                                                          |       | 6,676                                       |       | 6,154 |   |
| Deferred income tax  provision                                                                          |       | 2,049                                       |       | 1,856 |   |
| Stock-based compensation                                                                                |       | 1,260                                       |       | 65 |   |
| Allowance for doubtful  accounts                                                                        |       | —                                      |       | 531 |   |
| Provision for asset  impairment                                                                         |       | 748                                         |       | 4,947 |   |
| Provision for inventory  obsolescence                                                                   |       | 891                                         |       | 3,837 |   |
| Loss on disposal of  property and equipment                                                             |       | 158                                         |       | — |   |
| Loss from joint venture                                                                                 |       | 484                                         |       | — |   |
| (Increase) decrease in  assets —                                                                   |       |                                        |       |   |   |
| Accounts receivable                                                                                     |       | (4,010                                      | )          | (12,790 | ) |
| Inventories                                                                                             |       | (52,268                                     | )          | 26,711 |   |
| Advances to subcontractor                                                                               |       | (26,027                                     | )          | 14,197 |   |
| Prepaid income taxes                                                                                    |       | (8,893                                      | )          | 6,565 |   |
| Other current assets                                                                                    |       | (707                                        | )          | (1,290 | ) |
| Increase (decrease) in  liabilities —                                                              |       |                                        |       |   |   |
| Accounts payable                                                                                        |       | 37,039                                      |       | (41,433 | ) |
| Advance payments on  contracts                                                                          |       | 47,385                                      |       | (32,357 | ) |
| Due to United States  government                                                                        |       | 14,604                                      |       | 316 |   |
| Other current liabilities                                                                               |       | (8,865                                      | )          | (2,513 | ) |
| Total adjustments                                                                                       |       | 10,524                                      |       | (25,204 | ) |
| **Net cash  provided by (used in) operating activities**                                                |       | 18,341                                      |       | (9,900 | ) |
| **Cash flows  from investing activities:**                                                              |       |                                        |       |   |   |
| Purchases of marketable  securities                                                                     |       | (9,985                                      | )          | — |   |
| Capital expenditures                                                                                    |       | (5,302                                      | )          | (8,360 | ) |
| Investment in joint venture                                                                             |       | (2,149                                      | )          | — |   |
| **Net cash  used in investing activities**                                                              |       | (17,436                                     | )          | (8,360 | ) |
| **Cash flows  from financing activities:**                                                              |       |                                        |       |   |   |
| Proceeds from issuance of  common stock                                                                 |       | 37                                          |       | — |   |
| Net decrease in other  long-term liabilities                                                            |       | (128                                        | )          | (220 | ) |
| **Net cash  used in financing activities**                                                              |       | (91                                         | )          | (220 | ) |
| **Increase  (decrease) in cash and cash equivalents**                                                   |       | 814                                         |       | (18,480 | ) |
| **Cash and  cash equivalents at beginning of year**                                                     |       | 111,001                                     |       | 90,997 |   |
| **Cash and  cash equivalents at end of period**                                                         |       | $                                           | 111,815    |   | $ | 72,517 |   |
| **Supplemental  cash flow information:**                                                                |       |                                        |       |   |   |
| Cash paid during the period  for                                                                        |       |                                        |       |   |   |
| Interest, net of amounts  capitalized                                                                   |       | $                                           | 82         |   | $ | 238 |   |
| Income taxes                                                                                            |       | $                                           | 15,119     |   | $ | 91 |   |
| **Supplemental  schedule of noncash investing and financing activities:**                               |       |                                        |       |   |   |
| Property and equipment  additions in accounts payable                                                   |       | $                                           | 873        |   | $ | — |   |

 

The accompanyingnotes to condensed consolidated financial statements

are an integralpart of these statements.

 

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**1.    Summary of Significant Accounting Policies**

 

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

 

Force Protection, Inc.,a Nevada corporation, together with its subsidiaries, is a provider of blast-and ballistic-protected products used to support armed forces and securitypersonnel in harm’s way.  We design, manufacture, test, deliver andsupport our blast- and ballistic-protected products with the purpose to increasesurvivability of the users of the products.  Our specialty vehicles, whichwe believe are the forefront of blast- and ballistic-protected technology, aredesigned to protect their occupants from landmines, hostile fire, andimprovised explosive devices (“IEDs”).  We are a key provider of vehiclesto the United States military under the Mine Resistant Ambush Protected (“MRAP”)program. Our customers include all branches of the United States Department ofDefense (“DoD”) and through foreign military sales of the DoD, militarycustomers located in the United Kingdom, Iraq, Canada, Italy, and France, aswell as direct sales to the United Kingdom Ministry of Defence and theHungarian Ministry of Defense.

 

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.

 

We formedIntegrated Survivability Technologies Limited, an England and Wales company (“IST”),a joint venture between Force Protection Advanced Solutions Limited (“FPAS”), asubsidiary of Force Protection Industries, Inc., and NP Aerospace Limited(“NPA”), a subsidiary of The Morgan Crucible Company plc.   Pursuant to the terms of the joint venture,IST shall act as the prime contractor for vehicles and related total life cyclesupport awarded by the United Kingdom Ministry of Defence to ensure that thiscustomer has a single point of contact for its current and future ForceProtection fleet of vehicles (Buffalo, Mastiff, Ridgback and Wolfhound). FPAS and NPA each own a 50% interest in IST and the board of IST consistsof six members, three of whom are appointed by Force Protection.  As of June 30, 2009, we have contributed$2.1 million for this investment in IST. On July 1, 2009, the IST board agreed to defer the capitalcontribution which was due on July 6, 2009 to September 4, 2009,subject to further review by the parties of any future funding requirementsthat may be required. We account for this joint venture as an equity-methodinvestment.

 

On April 1,2009, IST received its first award from the United Kingdom Ministry of Defence,for the production of 97 fully integrated Wolfhound vehicles, which are basedon the Mastiff vehicle model, valued at approximately $122.6 million.  On April 1, 2009, IST awarded asub-contract to Force Protection Industries, Inc. for the delivery of 97base Wolfhound vehicles.  On April 1, 2009, IST awarded a subcontractto NPA for the integration of equipment and armor on the base vehicles providedto IST by Force Protection Industries, Inc. In May 2009, the UnitedKingdom Ministry of Defence exercised its option under the IST contract topurchase an additional representative blast vehicle, which IST subcontracted toForce Protection Industries, Inc.

 

On August 2,2009, FPAS changed its name to Force Protection Europe Limited, and we arefocusing on  enhancing its marketpresence and leveraging our brand strength in the United Kingdom and otherinternational markets.

 

On January 25,2007, we were awarded a Government Prime Contract by the United States MarineCorps Systems Command (“MARCORPSYSCOM”) for the delivery of, among otherthings, certain Category I and Category II Cougar vehicles and related lifecycle support services (“MRAP Competitive Contract”).  MARCORPSYSCOM subsequently issued a series ofdelivery orders related to the MRAP Competitive Contract.  We completed the work under these deliveryorders and may continue receiving delivery orders under the MRAP CompetitiveContract.  Commencing February 5,2007, we entered into certain letter agreements with General Dynamics LandSystems, Inc. (“GDLS”), whereby GDLS would act as a subcontractor forcertain work under the MRAP Competitive Contract.  On May 4, 2007, we requested thatMARCORPSYSCOM novate the MRAP Competitive Contract to Force Dynamics (describedbelow), but the novation has not yet occurred. On September 10, 2007, weentered into a subcontract (the “MRAP Subcontract”) with GDLS, incorporatingall prior letters of agreement and setting forth the provisions related to anysubsequent work awarded to GDLS by us under the MRAP Competitive Contract. Thework under the MRAP Competitive Contract continues to be performed by ForceProtection Industries, Inc. as the prime and specific work is performed byGDLS under the MRAP Subcontract.

 

Prior to the awardof the MRAP Competitive Contract, we entered into a joint venture agreementwith GDLS on December 15, 2006 (“Workshare Agreement”) with the intentthat the MRAP Competitive Contract would be 

 

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novated to thejoint venture.  Under the WorkshareAgreement, we and GDLS would each perform obligations for awards related to theMRAP Competitive Contract.  Infurtherance of this agreement, we and GDLS formed a Delaware limited liabilitycompany on January 8, 2007, Force Dynamics, LLC (“Force Dynamics”),to jointly pursue the MRAP Competitive Contract.  We account for this arrangement as anequity-based investment.

 

On December 8,2008, the MRAP Joint Program Office issued a competitive Request for Proposal (“RFP”),named the M-ATV through which the United States government was seeking avehicle solution that provides MRAP levels of survivability with enhancedmobility. On January 12, 2009, Force Dynamics submitted a proposal to theUS Army Tank-Automotive and Armaments Command (“TACOM”) for this RFP offeringthe M-ATV Cheetah as a solution. During the six months ended June 30,2009, Force Dynamics was awarded contracts for 5 production representativeM-ATV Cheetah vehicles and testing. Force Dynamics subcontracted the productionof these 5 vehicles to Force Protection Industries, Inc. and the testingto GDLS. On June 30, 2009, Force Dynamics was informed by TACOM that ourM-ATV Cheetah was not selected to receive the initial production delivery orderin the M-ATV competition.

 

***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, 2008 filedwith the United States Securities and Exchange Commission (“SEC”) on March 26,2009. These unaudited condensed consolidated financial statements have beenprepared pursuant to Rule 10-01 of Regulation S-X. Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America (“GAAP”) have been condensed or omitted pursuant to those rules andregulations, although we believe that the disclosures made herein are adequateto make the information not misleading.

 

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

 

These unaudited condensedconsolidated financial statements include the assets, liabilities, revenues andexpenses of our two wholly owned subsidiaries, Force Protection Industries, Inc.and Force Protection Technologies, Inc., and our 50% owned Delawarelimited liability company, Force Dynamics, LLC. We eliminate from our financialresults all significant intercompany accounts and transactions.

 

Certain prior periodinformation has been reclassified to conform to the current periodpresentation.

 

***Recent Accounting Pronouncements***

 

In April 2008, theFinancial Accounting Standard Board (“FASB”) issued FASB Staff Position (“FSP”)No. FAS 142-3,*Determination ofUseful Life of Intangible Assets,* (FSP FAS 142-3). FSPFAS 142-3 amends the factors that should be considered in developing therenewal or extension assumptions used to determine the useful life of arecognized intangible asset under FASB Statement No. 142,*Goodwill and Other Intangible Assets*. FSPFAS 142-3 also requires expanded disclosure related to the determinationof intangible asset useful lives. FSP FAS 142-3 is effective for fiscalyears beginning after December 15, 2008. Earlier adoption was prohibited.We adopted FSP FAS 142-3 in the first quarter of 2009.  This standard did not have a material impacton our consolidated financial position, results of operations and cash flows.

 

In September 2006,the FASB issued FASB Statement No. 157, *FairValue Measurements,* which clarifies the definition of fair valuewhenever another standard requires or permits assets or liabilities to bemeasured at fair value. Specifically, the standard clarifies that fair valueshould be based on the assumptions market participants would use when pricingthe asset or liability, and establishes a fair value hierarchy that prioritizesthe information used to develop those assumptions. FASB Statement No. 157does not expand the use of fair value to any new circumstances, and must beapplied on a prospective basis, except in certain cases. The standard alsorequires expanded financial statement disclosures about fair valuemeasurements, including disclosure of the methods used and the effect onearnings.

 

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In February 2008,FASB Staff Position (“FSP”) FAS No. 157-2, *Effective Date of FASB Statement No. 157,* was issued.FSP FAS No. 157-2 defers the effective date of FASB Statement No. 157to fiscal years beginning after December 15, 2008, and interim periodswithin those fiscal years, for all nonfinancial assets and liabilities, exceptthose that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually). Examples of items withinthe scope of FSP FAS No. 157-2 are nonfinancial assets andnonfinancial liabilities initially measured at fair value in a businesscombination (but not measured at fair value in subsequent periods), andlong-lived assets, such as property, plant, equipment and intangible assetsmeasured at fair value for an impairment assessment under FASB Statement No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets.*

 

The adoption of FASBStatement No. 157, including FSP FAS No. 157-2, with respect tofinancial assets and financial liabilities recognized or disclosed at fairvalue in the consolidated financial statements on a recurring basis, did nothave a material impact on our consolidated financial position, results ofoperations and cash flows. The Company adopted the provisions of SFAS No. 157for financial assets and liabilities on January 1, 2008, and fornonfinancial assets and liabilities on January 1, 2009.

 

FSP FAS 107-1/APB 28-1,which was issued in April 2009, requires disclosures about fair values offinancial instruments in interim and annual financial statements. Prior to theissuance of FSP FAS 107-1/APB 28-1, disclosures about fair values of financialinstruments were only required to be disclosed annually.  We adopted FSP FAS 107-1/APB 28-1 in thesecond quarter of 2009.  This standarddid not have an impact on our consolidated financial position, results ofoperations and cash flows.

 

In May 2009, theFASB issued FASB Statement No. 165, *Subsequent Events,* which defines a date throughwhich management must evaluate subsequent events, and lists the circumstanceswhich an entity must recognize and disclose events or transactions occurringafter the balance sheet date.  It iseffective prospectively for interim and annual periods ending after June 15,2009.  We adopted FASB Statement No. 165,*Subsequent Events*, on June 30,2009.  This standard did not have amaterial impact on our consolidated financial position, results of operationsand cash flows.

 

In July 2009, theFASB issued FASB Statement No. 168, *The Hierarchy of GenerallyAccepted Accounting Principles,*which launched the FASB AccountingStandards Codification that will become the single source of non-SECauthoritative GAAP.  It is effective forinterim and annual periods beginning after September 15, 2009.  We will adopt FASB Statement No. 168,*The Hierarchy of Generally Accepted Accounting Principles*,as of September 30, 2009.  This willnot have a material impact on our consolidated financial position, results ofoperations and cash flows.

 

We have determined thatall other recently issued accounting pronouncements will not have a materialimpact on our consolidated financial position, results of operations and cashflows, or do not apply to our operations.

 

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

 

Accounts receivableconsists of the following (in thousands):

 
| ** **                | ** ** | **As of  June 30,** | ** ** | **As of  December 31,** | ** ** |
|---------------------------|------------|--------------------------|------------|------------------------------|------------|
|                      |       | **2009**                 | ** ** | **2008**                     |       |
| United States government  |       | $                        | 101,800    |                         | $          | 114,230 |   |
| Other accounts receivable |       | 12,331                   |       | 24,219                       |       |
| Accounts receivable, net  |       | $                        | 114,131    |                         | $          | 138,449 |   |

 

Other accounts receivableincludes amounts that relate to non-government entities and the sale of excessraw materials to suppliers.  Any gain or loss on the sale of excess rawmaterials is included in*Other income(expense), net* in the accompanying condensed consolidated statementsof operations.  As of June 30, 2009 and December 31, 2008, ouraccounts receivable included $43.9 million and $8.6 million, respectively, ofearned and unbilled accounts receivable.  The earned and unbilled accounts receivable as of June 30, 2009 hasgrown significantly since December 31, 2008 primarily due to an increasedamount of not-to-exceed contracts where we cannot fully bill until thecontracts are definitized.

 

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**3.**    **Inventories**

 

Inventories consist ofthe following (in thousands):

 
| ** **                | ** ** | **As of  June 30,** | ** ** | **As of  December 31,** | ** ** |
|---------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **2009**                 | ** ** | **2008**                     | ** ** |
| Raw material and supplies |       | $                        | 82,616     |                         | $          | 64,857 |   |
| Work in process           |       | 30,463                   |       | 23,645                       |       |
| Finished goods            |       | 26,800                   |       | —                       |       |
| Inventories               |       | $                        | 139,879    |                         | $          | 88,502 |   |

 

Dueto excess and obsolete inventory and to account for our inventory at the lowerof cost or market, we reduce the cost basis of our raw material and suppliesand incur an expense to*Cost of sales*.

 

As of June 30, 2009,raw material and supplies includes $14.1 million of inventory related to theM-ATV Cheetah submission.

 

Work in process consistsof vehicles and subassemblies in process and overhead costs capitalized inending inventory.  As of June 30,2009, the work in process balance included $0.7 million relating to the M-ATVCheetah.

 

As of June 30,2009, the finished goods consists of $10.8 million of ForceArmorTM kits, $1.0million of Independent Suspension System (“ISS”) kits, $3.9 million of otherfinished products, and $11.1 million of vehicles, including: Wolfhound ($7.5 million), Buffalo A2 ($3.2 million)and M-ATV Cheetah ($0.4 million).

 

Total inventory relatingto the M-ATV Cheetah submission at June 30, 2009 is $15.2 million.Although we were not selected in the M-ATV competition for our M-ATV Cheetahvehicles, we are actively pursuing other opportunities with some potentialcustomers and believe that we can liquidate this inventory and recover allcosts incurred for this inventory.

 

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

 

Property and equipmentconsist of the following (in thousands):

 
| ** **                                            | ** ** | **As of  June 30,** | ** ** | **As of  December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **2009**                 | ** ** | **2008**                     | ** ** |
| Land                                                  |       | $                        | 4,419      |                         | $          | 4,419 |   |
| Buildings                                             |       | 12,957                   |       | 12,669                       |       |
| Leasehold improvements                                |       | 14,650                   |       | 13,988                       |       |
| Machinery and equipment;  including tooling and molds |       | 32,493                   |       | 32,421                       |       |
| Computer equipment and  software                      |       | 11,232                   |       | 9,062                        |       |
| Furniture and fixtures                                |       | 3,460                    |       | 3,580                        |       |
| Demonstration vehicles                                |       | 1,863                    |       | 1,863                        |       |
| Manuals                                               |       | 705                      |       | 705                          |       |
| Vehicles                                              |       | 783                      |       | 676                          |       |
|                                                  |       | 82,562                   |       | 79,383                       |       |
| Less: Accumulated  depreciation                       |       | (24,795                  | )          | (18,683                      | )          |
|                                                  |       | 57,767                   |       | 60,700                       |       |
| Construction in progress                              |       | 2,234                    |       | 729                          |       |
| Property and equipment,  net                          |       | $                        | 60,001     |                         | $          | 61,429 |   |

 

In March 2008, wedecided to suspend the construction of the assembly line at our Roxboro, NorthCarolina facility.  As a result, wecharged $4.9 million to operations in the first quarter of 2008, comprised of$2.1 million in deposits on services to be provided and $2.8 million in designcosts.

 

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During 2008, we completedthe renovation of our Roxboro facility and capitalized costs as buildingimprovements of approximately $5.8 million.  In May 2009, we began to use the Roxborofacility for training purposes.

 

In June 2009, wedetermined that certain customized machines, which were used to dispensevehicle fluids, no longer had a future benefit to us.  As a result, we charged $0.7 million tooperations in the second quarter of 2009 for these machines.

 

**5.**    **Advance Payments on Contracts**

 

Advance payments on contracts consist of the following(in thousands):

 
| ** **                                                  | ** ** | **As of  June 30,** | ** ** | **As of  December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **2009**                 | ** ** | **2008**                     | ** ** |
| Independent Suspension  System (“ISS”) kits       |       | $                        | 34,192     |                         | $          | — |   |
| ForceArmorTM kits                                       |       | 8,993                    |       |                         |       |
| Cougar Wolfhound                                            |       | 3,473                    |       |                         |       |
| Mine Resistant Ambush  Protected (“MRAP”) vehicle |       | 1,054                    |       | 29,504                       |       |
| Iraqi Light Armored  Vehicles (“ILAV”)            |       | 449                      |       | —                       |       |
| Other                                                       |       | 400                      |       | —                       |       |
| Advance payments on  contracts                              |       | $                        | 48,561     |                         | $          | 29,504 |   |

 

Under some of our United States government contracts,we receive performance-based payments based on completion of specificmilestones stipulated under the contract (for example, completion ofmanufacturing fabrication). We report these payments as*Advance payments on contracts* in ourconsolidated balance sheet until the final delivery of the products and formalacceptance by the United States government as evidenced by an executed Form DD250.

 

**6.**    **Income Taxes**

 

We provide for incometaxes using the liability method in accordance with FASB Statement No. 109,*Accounting for Income Taxes*. Inaccordance with APB Opinion No. 28,*Interim Financial Reporting*, and FASB Interpretation No. 18,*Accounting for Income Taxes in Interim Periods*,the provision for taxes on income recognizes our estimate of the effective taxrate expected to be applicable for the full year, adjusted for the impact ofany discrete events, which are reported in the period in which they occur. Eachquarter, we re-evaluate our estimated tax expense for the year and makeadjustments for changes in the estimated tax rate. Additionally, we evaluatethe realizability of our deferred tax assets on a quarterly basis. Ourevaluation considers all positive and negative evidence and factors, such asthe scheduled reversal of temporary differences, historical and projectedfuture taxable income or losses, and prudent and feasible tax planningstrategies.

 

The**incometax expense for the three and six months ended June 30, 2009 wasbased on the estimated effective tax rates applicable for the fiscal yearending December 31, 2009, after considering items specifically related tothe interim period.  The income taxexpense for the three- and six-month periods ended June 30, 2008 was basedon the estimated effective tax rates applicable for the fiscal year ended December 31,2008, after considering items specifically related to the interim period.

 

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

 
| ** **                        | ** ** | **For the  three months ended** | ** ** | **For the  six months ended** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **June 30,**               | ** ** | **June 30,**             | ** ** |
| ** **                        | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Income before income tax  expense |       | $                               | 619        |                          | $          | 13,149 |   | $ | 11,867 |   | $ | 24,381 |   |
|                                   |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |

 

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

 

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| ** **                                      | ** ** | **For the  three months ended** | ** ** | **For the  six months ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **June 30,**               | ** ** | **June 30,**             | ** ** |
| ** **                                      | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Income tax expense at statutory rate            |       | 35.00                           | %          | 35.00                         | %          | 35.00 | % | 35.00 | % |
| Increase (decrease) in tax rate resulting from: |       |                            |       |                          |       |   |   |   |   |
| State income taxes, net of federal tax benefit  |       | 0.20                            | %          | 1.93                          | %          | 0.68 | % | 1.93 | % |
| Research and development credit                 |       | 18.05                           | %          | —                        |       | (1.54 | )% | — |   |
| Domestic Production Activities Deduction        |       | (14.48                          | )%         | —                        |       | (1.06 | )% | — |   |
| Other permanent differences                     |       | —                          |       | (1.04                         | )%         | — |   | (0.94 | )% |
| Nondeductible items                             |       | (10.04                          | )%         | 1.24                          | %          | 1.05 | % | 1.24 | % |
| Effective income tax expense rate               |       | 28.73                           | %          | 37.13                         | %          | 34.13 | % | 37.23 | % |

 

The effective income taxrate is the provision for income tax expense as a percent of income beforeincome taxes. The effective rate for the six months ended June 30, 2009 islower than the expected federal statutory rate of 35% due to research anddevelopment tax credits and the Domestic Production Activities Deduction,partially offset by state income taxes and nondeductible items.

 

We adopted FASBInterpretation No. 48 on January 1, 2007. FASB Interpretation No. 48clarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements in accordance with FASB Statement No. 109,*Accounting for Income Taxes*. FASBStatement No. 109 does not prescribe a recognition threshold ormeasurement attribute for the financial statement recognition and measurementof a tax position taken in a tax return. FASB Interpretation No. 48clarifies the application of FASB Statement No. 109 by defining acriterion that an individual tax position must meet for any part of the benefitof that position to be recognized in a company’s financial statements.Additionally, FASB Interpretation No. 48 provides guidance on measurement,derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. We include interest and penalties relatedto federal and state income taxes, if any, as a component of*Income tax expense* in the accompanyingunaudited condensed consolidated statements of operations.

 

We believe that we haveappropriate support for the income tax positions taken and to be taken on ourincome tax returns and that our income tax receivable and accruals for taxliabilities are adequate for all open years based on an assessment of manyfactors including past experience and interpretations of tax laws applied tothe facts of each matter.  Accordingly,we have not recognized a liability as a result of applying the guidance in FASBInterpretation No. 48.

 

**7.**    **Earnings Per Common Share**

 

The following table showsthe information used in the calculation of basic and diluted earnings percommon share (in thousands, except number of shares and per share amounts):

 
| ** **                                               | ** ** | **For the  three months ended** | ** ** | **For the  six months ended** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                               | ** ** | **June 30,**               | ** ** | **June 30,**             | ** ** |
| ** **                                               | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Numerator  — Basic and diluted:**                 |       |                            |       |                          |       |   |   |   |   |
| Net income                                               |       | $                               | 441        |                          | $          | 8,267 |   | $ | 7,817 |   | $ | 15,304 |   |
| **Denominator:**                                         |       |                            |       |                          |       |   |   |   |   |
| Weighted average common shares outstanding —basic   |       | 68,424,750                      |       | 68,311,399                    |       | 68,416,226 |   | 68,304,250 |   |
| Add: Stock options                                       |       | 172,039                         |       | 26,713                        |       | 138,705 |   | 26,868 |   |
| Add: Stock grants                                        |       | 381,860                         |       | 34,012                        |       | 354,201 |   | 36,544 |   |
| Weighted average common shares outstanding —diluted |       | 68,978,649                      |       | 68,372,124                    |       | 68,909,132 |   | 68,367,662 |   |
| **Basic  earning per common share:**                     |       |                            |       |                          |       |   |   |   |   |
| Net income — basic                                  |       | $                               | 0.01       |                          | $          | 0.12 |   | $ | 0.11 |   | $ | 0.22 |   |
| **Diluted  earning per common share:**                   |       |                            |       |                          |       |   |   |   |   |
| Net income — diluted                                |       | $                               | 0.01       |                          | $          | 0.12 |   | $ | 0.11 |   | $ | 0.22 |   |

 

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The calculation ofearnings per common share is based on the weighted-average number of our commonshares outstanding during the applicable period. The calculation for dilutedearnings per common share recognizes the effect of all dilutive potentialcommon shares that were outstanding during the respective periods, unless theirimpact would be anti-dilutive. We use the treasury stock method tocalculate the dilutive effect of stock options and other common stockequivalents (potentially dilutive shares). These potentially dilutive sharesinclude stock options and stock grants. For the periods presented above, we have not excluded any potentiallydilutive shares from the calculation of diluted earnings per share.

 

**8.**    **Commitments and Contingencies**

 

*Financing Commitments— Creditfacility*

 

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%. Theoriginal amount of the agreement was $50 million and all amounts payable underthis credit agreement were originally due and payable on September 30,2007. We have entered into several modification agreements with the lender toreduce the principal amount, change terms and extend the maturity.

 

On October 31, 2008,we modified the agreement to adjust the principal amount to a maximum of $40million, subject to several new covenants, to extend the maturity to April 30,2010, and to modify the interest rate. One of the new covenants is a maximumratio of debt (“Funded Debt”) to net income plus interest expense, incometaxes, depreciation and amortization (“EBITDA”) of 2.0 to 1.0. Another newcovenant is a minimum fixed charge coverage ratio of 1.5 to 1.0.

 

Until March 31,2009, the floating rate interest per annum was reduced to the one-month LIBOR plusan additional amount (“Applicable Margin”) of 1.75%. Beginning with the quarterstarted April 1, 2009, the Applicable Margin is determined quarterly basedon the Funded Debt to EBITDA ratio calculated on a rolling four quarter basisand varies from 1.75% to 2.75% depending on that ratio.

 

Accrued interest is dueand payable on a monthly basis, starting on November 30, 2008, and allprincipal is due and payable on April 30, 2010. Until the expiration date,we may borrow, repay and re-borrow amounts under the terms of the note as longas the total principal balance outstanding does not exceed $40 million.Additionally, in connection with the original credit agreement dated July 20,2007, we granted Wachovia Bank a security interest in all of our personal property,as defined in the credit agreement. Since its inception through the date ofthis filing, we have not borrowed any amounts under the credit agreement.  As of June 30, 2009, we are incompliance with all of our line of credit covenants.

 

Shareholder DerivativeComplaints

 

As previously reported,between March 27, 2008 and May 28, 2008, various alleged shareholdersfiled derivative lawsuits against former and current officers or board memberswherein the plaintiff shareholders are seeking damages for the Company. TheCompany has been named a nominal defendant in each derivative lawsuit. Fourderivative lawsuits pending in the United States District Court for theDistrict of South Carolina Charleston Division were consolidated on March 31,2009, under the caption “In Re Force Protection, Inc.  Derivative Litigation, Action No. 2:08-cv-01907-CWH”,three derivative lawsuits are pending in Charleston, South Carolina CircuitCourt, and one derivative lawsuit pending in Clark County, Nevada DistrictCourt has been stayed.  The plaintiffs in the derivative lawsuitstayed in Clark County, Nevada re-filed their lawsuit in Charleston,South Carolina Circuit Court on April 9, 2009.  An order toconsolidate the three shareholder derivative actions filed in Charleston, SouthCarolina Circuit Court was issued by the Court on May 27, 2009.

 

CertainOther Disputes

 

On February 8, 2008,a temporary independent contractor whose services we had terminated filed acomplaint with OSHA which alleges a violation under the employee protectionprovisions of Section 806 of the Corporate and Criminal FraudAccountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18U.S.C. §1514A. The former independent contractor alleges that we terminated hisengagement in retaliation for his allegation of certain corporate governance,government contracting, accounting and other irregularities. On April 18,2008, we responded 

 

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to the allegations. In August 2008the claimant submitted a proposed amended complaint which sought to addadditional claims and the current and former chief executive officers asdefendants. On October 2, 2008, Force Protection and individuals submitteda further response. On November 20, 2008, the claimant exercised hisrights under Section 806 to withdraw his claim from the Department ofLabor, stating that he had decided instead to pursue his claims in a lawsuit infederal district court. As a result of the claimant’s election, the Departmentof Labor terminated its processing of the matter at that time. On June 26,2009 a lawsuit was filed by the individual against the Company in the UnitedStates District Court for the District of South Carolina, Charleston Divisionas Civil Action No. 2:09cv1708-DCN-BM.

 

On or about June 17,2009, ASG Renaissance filed a demand for arbitration against Force ProtectionIndustries, Inc., bearing the caption *ASG Renaissance v. ForceProtection Industries, Inc.*, No. 31 132 Y 00256 09, withthe American Arbitration Association. Both ASG and Force Protection alleged breach of contract among otherrequests for relief.  On July 13,2009, we settled this matter for $325,000 and reversed the accrual, which wasincluded in *Total current liabilities* as of June 30,2009.

 

In connection with oursuit against Protected Vehicles, Inc. (“PVI”) and three of PVI’semployees, as disclosed in the section entitled “Legal Proceedings”in Note 14, *Commitments and Contingencies*, Part Iof our Annual Report on Form 10-K for the year ended December 31,2008, as of February 2, 2009 Force Protection Industries, Inc. andForce Protection, Inc. had entered into a settlement agreement withdefendants, including the third-party purchaser of the bulk of PVI’s assets(which includes certain rights and liabilities with respect to our suit againstit), in which the defendants agreed to identify and return all our property andrefrain from using it in the future, and agreed to dismiss all claims againstus.   As of June 4, 2009, we enteredinto a supplemental agreement with the third party purchaser in which thatpurchaser agreed to pay us $160,000 in exchange for a covenant not to sue forits continued use of certain Force Protection files on PVI devices that were tohave been identified and returned under the February 2, 2009 agreement.

 

Although we intend todefend ourselves in connection with the foregoing legal proceedings and claimsand the legal proceedings set forth in Part I, Note 14, *Commitments and Contingencies*, of our Annual Report on Form 10-Kfor the year ended December 31, 2008, there can be no assurance that wewill ultimately prevail in any of these matters.  Moreover, the defense of these claims and proceedingsmay result in substantial legal expenses and diversion of our management, andany settlement or adverse judgment may require us to make substantial payments,any of which could have a material adverse effect on our business or financialposition, results of operations, or cash flows.

 

We are also a party toother litigation which we consider routine and incidental to our business. Wemay be involved from time to time in other litigation that could have amaterial effect on our operations or finances. Other than the litigationdescribed above and in Part I, Note 14, *Commitmentsand Contingencies*, of our Annual Report on Form 10-K for theyear ended December 31, 2008, we are not aware of any pending orthreatened litigation against us that could have a material adverse effect onour business or financial position, results of operations, or cash flows.

 

**9.**    **Subsequent Events**

 

Subsequent events havebeen considered through August 10, 2009.

 

**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 to assist the reader in obtaining anunderstanding of our unaudited condensed consolidated financial statements, thechanges in certain key items in those financial statements from period toperiod, the primary factors that accounted for those changes, and any knowntrends or uncertainties that we are aware of that may have a material effect onour future performance, as well as how certain accounting principles affect ourunaudited condensed consolidated financial statements. MD&A includes thefollowing sections:

 

·                  Overview

 

·                  Our Business

·            BusinessModel and Key Concepts

 

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·            KeyChallenges

·            Strategyand Key Trends

 

·                  Results of Operations—an analysis of ourconsolidated results of operations, for the three- and six-month periodspresented in our unaudited condensed consolidated financial statements

 

·                  Liquidity and Capital Resources—ananalysis of the effect of our operating, financing and investing activities onour liquidity and capital resources

 

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

 

·                  Contractual Obligations—a summary of ouraggregate contractual obligations

 

·                  Critical Accounting Policies andEstimates—a discussion of accounting policies that require significantjudgments and estimates

 

·                  New Accounting Pronouncements—a summaryand discussion of our plans for the adoption of new accounting standardsrelevant to us

 

**SPECIAL NOTE 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 and business.We have identified some of these forward-looking statements with words likebelieve, may, will, should, expect, intend, plan, predict, anticipate, estimateor continue and other words and terms of similar meaning. These forward-lookingstatements include, among other things:

 

·                  statements regarding the growth of theUnited States and world market for blast- and ballistic-protected vehicles andsurvivability solutions;

 

·                  statements with respect to ourexpectation regarding our ability to obtain materials, components and suppliesnecessary to manufacture our vehicles, our ability to improve costefficiencies, including, without limitation, as a result of volume purchasing,improvements in our manufacturing process and possible future changes in theefficiencies in our operations;

 

·                  statements regarding any changes in ourcost of sales, our general and administrative expenses or our research anddevelopment expenses;

 

·                  statements regarding the effect on ourfinancial statements of the adoption of new accounting standards;

 

·                  statements regarding the revenues thatmay be derived from, and the quantities of vehicles that may be purchased orordered pursuant to, existing or possible future contracts or orders by variouscustomers, including statements regarding the estimated value of those ordersand contracts and statements about the amount of vehicles in our backlog andthe value of our backlog and statements regarding potential customers for the50 M-ATV Cheetah vehicles;

 

·                  statements regarding our ability tostabilize our business to match our contract delivery order requirements,including the rebalancing of our work force to meet the demand for ourvehicles, the effectiveness of the utilization of partners and subcontractorsand improvements to our accounting and financial systems;

 

·                  statements regarding the amount ofcapital we will require in the future;

 

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·                  statements regarding our plans for theuse of our product development and production facilities; and

 

·                  statements regarding the rate at which weproduce our vehicles, including orders for our Cougar and Buffalo vehicles andwhen we and IST will produce Wolfhound vehicles, and the date as of which wewill achieve any particular monthly production rate of these vehicles.

 

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**

 

All of our products areaimed at offering improved protection to personnel operating in areas posingthreats of blast- or ballistic- attack. Since the early stages of OperationIraqi Freedom and Operation Enduring Freedom, the United States military hassought tactical wheeled vehicle solutions that balance three potentiallycompeting operational or mission dynamics: (i) protection, which refers tothe level of crew survivability against blast- and ballistic- attack; (ii) payload,which refers to the load that the vehicles can carry on board the platform, measuredin units, such as crew members and cargo; and (iii) performance, whichrefers to a vehicle’s automotive mobility, its ability to provide technologicalsolutions to mission requirements, and its suitability for transportation inexisting military aircraft and ships.

 

We currently offer thefollowing vehicle types aimed at fulfilling different operational or missionrequirements:

 

·                  The Buffalo platform;

 

·                  The Cougar platform; and

 

·                  The Cheetah platform.

 

We also currently offerForceArmorTM as an external bolt-on solution, which provides state-of-the-artprotection against attack by explosively formed projectiles, or EFPs. ForceArmorTMis designed of commercially available materials that, when combined andpackaged into a kit, offer lightweight solutions that can be tailored to bolton to the outside of any wheeled military vehicle platform. It is a modularsolution that enables unit commanders to rapidly install or remove the kitdepending on the threat they face. We also offer products and solutions whichare aimed at enhancing the survivability of vehicles against further attacks,such as our Life Cycle Support and ForceArmor*TM.*

 

We formedIntegrated Survivability Technologies Limited, an England and Wales company (“IST”),a joint venture between Force Protection Advanced Solutions Limited (“FPAS”), asubsidiary of Force Protection Industries, Inc., and NP Aerospace Limited(“NPA”), a subsidiary of The Morgan Crucible Company plc.   Pursuant to the terms of the joint venture,IST shall act as the prime contractor for vehicles and related total life cyclesupport awarded by the United Kingdom Ministry of Defence to ensure that this customerhas a single point of contact for its current and future Force Protection fleetof vehicles (Buffalo, Mastiff, Ridgback and Wolfhound). FPAS and NPA each own a50% interest in IST and the board of IST consists of six members, three of whomare appointed by Force Protection.  As ofJune 30, 2009, we have contributed $2.1 million for this investment inIST.  On July 1, 2009, the IST boardagreed to defer the capital contribution which was due on July 6, 2009 to September 4,2009 subject to further review by the parties of any future fundingrequirements that may be required. We account for this joint venture as anequity-method investment.

 

On April 1,2009, IST received its first award from the United Kingdom Ministry of Defence,for the production of 97 fully integrated Wolfhound vehicles, which are basedon the Mastiff vehicles, valued at approximately $122.6 million.  On April 1, 2009, IST awarded asubcontract to Force Protection Industries, Inc. for the delivery of 97base Wolfhound vehicles.  On April 1, 2009, IST awarded a subcontractto NPA for the integration of equipment and armor on the base vehicles providedto IST by Force Protection Industries, Inc. In May 2009, the UnitedKingdom Ministry of Defence exercised its option under the IST contract topurchase an additional representative blast vehicle, which IST subcontracted toForce Protection Industries, Inc.

 

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On August 2,2009, FPAS changed its name to Force Protection Europe Limited. We are focusingon enhancing its market presence and leveraging our brand strength in theUnited Kingdom and other international markets.

 

On January 25,2007, we were awarded a Government Prime Contract by the United States  Marine Corps Systems Command (“MARCORPSYSCOM”)for the delivery of, among other things, certain Category I and Category IICougar vehicles and related life cycle support services (“MRAP CompetitiveContract”).  MARCORPSYSCOM subsequentlyissued a series of delivery orders related to the MRAP CompetitiveContract.  We have completed the workunder these delivery orders and may continue receiving delivery orders underthe MRAP Competitive Contract.  CommencingFebruary 5, 2007, we entered into certain letter agreements with GeneralDynamics Land Systems, Inc. (“GDLS”), whereby GDLS would act as asubcontractor for certain work under the MRAP Competitive Contract.  On May 4, 2007, we requested that MARCORPSYSCOMnovate  the MRAP Competitive Contract toForce Dynamics (described below) but the novation has not yet occurred. On September 10,2007, we entered into a subcontract (the “MRAP Subcontract”) with GDLS,incorporating all prior letters of agreement and setting forth the provisionsrelated to any subsequent work awarded to GDLS by us under the MRAP CompetitiveContract. The work under the MRAP Competitive Contract continues to beperformed by Force Protection Industries, Inc. as the prime contractor,and specific work is performed by GDLS under the MRAP Subcontract.

 

Prior to the awardof the MRAP Competitive Contract, we entered into a joint venture agreementwith GDLS on December 15, 2006 (“Workshare Agreement”) with the intentthat the MRAP Competitive Contract would be novated to the joint venture.  Under the Workshare Agreement, we and GDLSwould each perform obligations for awards related to the MRAP CompetitiveContract.  In furtherance thereof, we andGDLS formed a Delaware limited liability company on January 8, 2007, ForceDynamics, LLC (“Force Dynamics”), to jointly pursue the MRAP CompetitiveContract.  We account for thisarrangement as an equity-based investment.

 

On December 8,2008, the MRAP Joint Program Office issued a competitive Request for Proposal (“RFP”),named the M-ATV through which the United States government was seeking avehicle solution that provides MRAP levels of survivability with enhancedmobility. On January 12, 2009, Force Dynamics submitted a proposal to theUS Army Tank-Automotive and Armaments Command (“TACOM”) for this RFP offeringthe M-ATV Cheetah as a solution. During the six months ended June 30,2009, Force Dynamics was awarded contracts for 5 production representativeM-ATV Cheetah vehicles and testing. Force Dynamics subcontracted the productionof these 5 vehicles to Force Protection Industries, Inc. and the testingto GDLS. On June 30, 2009, Force Dynamics was informed by TACOM that ourM-ATV Cheetah was not selected to receive the initial production delivery orderin the M-ATV competition.

 

We are headquartered, andhave leased manufacturing facilities, in Ladson, South Carolina. In March 2007,we purchased a blast range in Edgefield, South Carolina, and leased a relatedoffice building. We use these facilities for our own research and developmentactivities and may also contract with selected governmental and commercialcustomers to use our facilities. We also purchased, in March 2007, afacility in Summerville, South Carolina, to expand our research and developmentoperations and to facilitate our increased customer training requirements ofproducts and applications. In July 2007, we purchased an additionalfacility in Roxboro, North Carolina and in May 2009, we began to use thisfacility for training and sustainment purposes. In October 2008, we leasedan office in the Washington DC vicinity. In November 2008, we leasedoffice space in Sterling Heights, Michigan, for use as an offsite engineeringoffice. In January 2009, we leased office and warehouse space in NorthCharleston, SC. In March 2009, IST leased office space in Bristol, UnitedKingdom.  In May 2009, we enteredinto an agreement to sublease a vehicle support facility in Kuwait. In July,2009 we exercised an option to renew and extended our lease for Building No. 3at Ladson facility.

 

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.

 

**OurBusiness**

 

*BusinessModel and Key Concepts*

 

Our business is heavilyinfluenced by the needs of the United States military for blast- andballistic-protected wheeled vehicles. The United States Department of Defense (“DoD”)is our largest customer, although we have recently begun direct sales toforeign governments. We continually align our workforce to satisfy our businessrequirements.

 

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*KeyChallenges*

 

Our rapid growth has comewith numerous challenges. Coupled with our reliance on the United Statesmilitary for substantially all of our business, we have identified thefollowing key challenges to continued success:

 
| · | Continuing to capture  contract awards for our products and services in a competitive marketplace;                                                   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                 |
| · | Expanding our  operations internationally;                                                                                                           |
|   |                                                                                                                                                 |
| · | Competing for life  cycle logistics support for our fielded fleet of vehicles;                                                                       |
|   |                                                                                                                                                 |
| · | Establishing long-term  programs to include upgrades, remanufacture, and sustainment for our fleet of  vehicles;                                     |
|   |                                                                                                                                                 |
| · | Continuing the  expansion of our customer base both domestically and internationally;                                                                |
|   |                                                                                                                                                 |
| · | Continuing the  development of new products and services to bring to market;                                                                         |
|   |                                                                                                                                                 |
| · | Establishing and maintaining  our presence in the United Kingdom and international markets, subcontracting  arrangements and teaming agreements; and |
|   |                                                                                                                                                 |
| · | Eliminating or reducing  internal control weaknesses over financial reporting and disclosure.                                                        |

 

The main uncertainty aboutour future operations is whether we will continue to receive additional ordersor contracts for our vehicles or our survivability solutions. We have nofurther substantial MRAP vehicle orders to fulfill at this time. Orders for ourCougar variant vehicles will allow us to continue production through the fourthquarter of 2009 and for our Buffalo vehicles to extend production through thefirst quarter of 2010. It is impossible to predict with certainty whether suchfuture orders or contracts will be placed by existing or new customers. If wedo not receive future orders or contracts for production beyond such dates, itis unlikely that our vehicle business will continue and our business will bematerially affected.

 

Substantially all of ourincome has previously come from our United States government contracts eitheras a prime contractor or as a subcontractor to another prime contractor to theUnited States government. However, approximately 58% of our current vehiclebacklog relates to our subcontract with IST to deliver base Wolfhound vehicleswhich will ultimately be delivered to the United Kingdom Ministry ofDefence.  We received and fulfilled alarge number of vehicle orders from the United States military under the MRAPprogram, which accounted for substantially all of the increase in our net salesduring the year ended December 31, 2008. These orders have resulted, insignificant part, from the particular combat situations encountered by theUnited States military in Iraq and Afghanistan, especially the use ofimprovised explosive devices, or IEDs, and EFPs by enemy combatants. We cannotbe certain, therefore, to what degree the United States military or otherforeign governments will continue placing orders, and these orders may decreasesignificantly or cease. The loss or significant reduction in government fundingof a large program in which we participate could also result in a materialdecrease to our future sales, earnings and cash flows.

 

We have identifiedmaterial weaknesses in our internal control over financial reporting and haveconcluded that our disclosure controls were not effective as of June 30,2009.  Although we have taken steps tocorrect our material weaknesses, we may still be subject to risks. If we areunsuccessful in implementing or following our remediation plan, or fail toupdate our internal control over financial reporting as our business evolves,we may be unable to report financial information timely and accurately or tomaintain effective internal controls and procedures. There can be no assurancethat, as a result of these remediation efforts or otherwise, we will notidentify other inaccuracies in either our previous or future financialstatements that will require amendments and restatements to those financialstatements, which could have a material adverse effect on us and the price ofour common stock.

 

During 2008 and the firstsix months of 2009, we sought to stabilize our business to match our contractdelivery order requirements. We recognize that our business is changing, and inresponse, we are attempting to rebalance our workforce and manufacturingcapacity. We may incur costs as a result of our efforts to recalibrate ourbusiness to meet the needs of our customers. In addition, in the past threeyears we had sought to rapidly expand and develop our operations and productioncapacity. We have incurred costs and are continuing to incur significant costs 

 

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associated with our rapidexpansion based on the expectation of future contract revenues. We are stillexperiencing and may continue to experience certain effects from this rapidgrowth, such as payments under severance arrangements and the costs associatedwith excess manufacturing capacity and inventory. This has placed significantdemands on our management and our administrative, operating, manufacturing andfinancial resources. In addition, our accounting and financial systems need tobe substantially improved in order to accommodate our current and projectedproduction levels and to support our government compliance requirements nowthat we are classified as a large business under applicable federal contractingregulations. We continue to face challenges in improving our administrative,operating, managerial, accounting and financial systems to accommodate ourcurrent and projected production levels.

 

*Strategyand Key Trends*

 

Strategy

 

Our business strategy isbuilt around three main imperatives: first, constant focus on innovation andthe introduction of new survivability products and solutions; second, expandour customer base; and third, obtain contracts for sustainment services of ourfleet of vehicles across all customers. Some of our actions to meet theseimperatives include:

 

·                  Identify new products and markets to meetevolving customer requirements;

 

·                  Capitalize on the demand for blast- andballistic-protected vehicles and other survivability solutions;

 

·                  Expand our total life cycle supportfootprint;

 

·                  Expand and diversify our customer base;

 

·                  Focus on core competencies;

 

·                  Stabilizing our business to match currentproduction requirements;

 

·                  Leverage key relationships to grow ourbusiness; and

 

·                  Develop and expand strategicpartnerships.

 

Key Trends

 

We expect that certainkey trends may affect our results of operations as compared to results reportedthrough 2008. Some of these trends include:

 

·                  Likely reduction of combat forces usingour vehicles in Iraq will reduce the operational tempo placed on our fleet;

 

·                  An increase in military forces deployingto Afghanistan will necessitate modifications to the vehicles and increasedsustainment and maintenance requirements;

 

·                  Declining defense budgets may have animpact on planned future defense procurement needs; and

 

·                  Our current customers establishinglong-term plans and visibility for their fleets of our vehicles.

 

**Resultsof Operations**

 

The following discussionand analysis is based on our unaudited condensed consolidated statements ofoperations, which reflect our results of operations for the three- andsix-month periods ended June 30, 2009 and 2008 as prepared in accordancewith generally accepted accounting principles in the United States of America (“GAAP”).

 

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***Comparisonof Results of Operations for the Three and Six Months Ended June 30, 2009and 2008***

 

The following tablepresents our results of operations for the three- and six-month periods ended June 30,2009 and 2008 as well as the percentage change from year to year.

 
| ** **                          | ** ** | **For the  three months ended June 30,** | ** ** | **For the  six months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | ** **                                    | ** ** | ** **                                  | ** ** | **Percentage** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **(in  thousands)**                 | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** |
| Net sales                           |       | $                                             | 187,116    |                                        | $          | 340,917 |   | -45 | % | $ | 371,850 |   | $ | 743,964 |   | -50 | % |
| Cost of sales                       |       | 161,403                                       |       | 303,566                                     |       | -47 | % | 309,235 |   | 668,282 |   | -54 | % |
| Gross profit                        |       | 25,713                                        |       | 37,351                                      |       | -31 | % | 62,615 |   | 75,682 |   | -17 | % |
| General and administrative expenses |       | 20,172                                        |       | 21,525                                      |       | -6 | % | 41,023 |   | 46,150 |   | -11 | % |
| Research and development expenses   |       | 4,892                                         |       | 3,039                                       |       | 61 | % | 9,497 |   | 5,899 |   | 61 | % |
| Operating income                    |       | 649                                           |       | 12,787                                      |       | -95 | % | 12,095 |   | 23,633 |   | -49 | % |
| Other income (expense),  net        |       | (133                                          | )          | 460                                         |       | -129 | % | (195 | ) | 971 |   | -120 | % |
| Interest income (expense),  net     |       | 103                                           |       | (98                                         | )          | -205 | % | (33 | ) | (223 | ) | -85 | % |
| Income before income tax expense    |       | 619                                           |       | 13,149                                      |       | -95 | % | 11,867 |   | 24,381 |   | -51 | % |
| Income tax expense                  |       | (178                                          | )          | (4,882                                      | )          | -96 | % | (4,050 | ) | (9,077 | ) | -55 | % |
| Net income                          |       | $                                             | 441        |                                        | $          | 8,267 |   | -95 | % | $ | 7,817 |   | $ | 15,304 |   | -49 | % |

 

*Unitssold*

 

The following tablepresents our vehicle shipments for the three- and six-month periods ended June 30,2009 and 2008 as well as the percentage change from year to year.

 
| ** **            | ** ** | **For the  three months ended June 30,** | ** ** | **For the  six months ended June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | ** **                                    | ** ** | ** **                                  | ** ** | **Percentage** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **(units  sold)**     | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** |
| Buffalo               |       | 17                                            |       | 25                                          |       | -32 | % | 29 |   | 49 |   | -41 | % |
| Cougar (all variants) |       | 22                                            |       | 560                                         | *          | -96 | % | 144 |   | 1,315 | * | -89 | % |
| Cheetah               |       | 3                                             |       | —                                      |       | n/m |   | 5 |   | — |   | n/m |   |
| Total units sold      |       | 42                                            |       | 585                                         |       | -93 | % | 178 |   | 1,364 |   | -87 | % |

 

----

n/m—not meaningful

 

* Includes 300 and 721vehicles produced by GDLS for the three and six months ended June 30,2008, respectively. This balance excludes the Iraqi Light Armored Vehicles (“ILAV”)for which we act as a subcontractor to primarily provide labor only for aportion of the production of the vehicles. As a result, we have reduced thepreviously reported units sold for Cougar (all variants) and total units soldby 5 and 27 units for the three and six months ended June 30, 2008, respectively.

 

The decrease in vehiclessold for the three- and six-month comparative periods is primarily due to thecompletion of the sole source and competitive contracts awarded to us under theMRAP program during 2008.  Additionally,during the six months ended June 30, 2009, we continued to experiencedelays in the initial production of the Buffalo A2 route-clearance vehicle.

 

*Netsales*

 

The decrease in net salesfrom the comparative periods is attributable to a decrease in volume of vehicledeliveries, partially offset by a $2.1 million reduction of a definitizationreserve and an increase in sales of spare parts and logistics services, whichincludes field service representatives, training, modernization efforts, ILAV

 

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subcontractor revenuesand technical publications. The mix of vehicles delivered and spare parts andlogistics sales and the percentage change in the comparative periods are setforth in the following table:

 
| ** **                | ** ** | **For the  three months ended June 30,** | ** ** | **For the  six months ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | ** **                                    | ** ** | ** **                                  | ** ** | **Percentage** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **(in thousands)**        | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** |
| Buffalo                   |       | $                                             | 18,630     |                                        | $          | 16,968 |   | 10 | % | $ | 29,430 |   | $ | 33,660 |   | -13 | % |
| Cougar (all variants)     |       | 18,358                                        | *          | 269,352                                     | *          | -93 | % | 73,980 | * | 627,026 | * | -88 | % |
| Cheetah                   |       | 2,362                                         |       | —                                      |       | n/m |   | 3,362 |   | — |   | n/m |   |
| Spare parts and logistics |       | 147,766                                       |       | 54,597                                      |       | 171 | % | 265,078 |   | 83,278 |   | 218 | % |
|                      |       | $                                             | 187,116    |                                        | $          | 340,917 |   | -45 | % | $ | 371,850 |   | $ | 743,964 |   | -50 | % |

 

----

n/m—not meaningful

 

* Excludes revenue fromthe ILAV for which we act as a subcontractor to primarily provide labor onlyfor a portion of the production of the Cougar (all variants) and related spareparts and logistics revenue. As a result, we have recorded $0.0 million and$0.4 million and we reclassified $0.5 million and $6.1 million from Cougar (allvariants) to spare parts and logistics revenue for the three and six monthsended June 30, 2009 and June 30, 2008, respectively.

 

*Cost ofsales and Gross profit*

* *
| ** **                           | ** ** | **For the  three months ended June 30,** | ** ** | **For the  six months ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                   | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Cost of sales                        |       | $                                             | 161,403    |                                        | $          | 303,566 |   | $ | 309,235 |   | $ | 668,282 |   |
| Gross profit                         |       | $                                             | 25,713     |                                        | $          | 37,351 |   | $ | 62,615 |   | $ | 75,682 |   |
| Gross profit percentage of net sales |       | 13.7                                          | %          | 11.0                                        | %          | 16.8 | % | 10.2 | % |

 

**The grossprofit percentage increased by 2.7 and 6.6 percentage points for the three andsix months ended June 30, 2009, over the comparable 2008 periods. Theincrease was primarily due to the absence of the fulfillment of awards pursuantto our MRAP Subcontract activity during 2009. During the three and six months ended June 30, 2008, we recognized** no gross profit on $143.3 million and$339.6 million of vehicles sold that were produced by GDLS. There were novehicles produced by GDLS under the MRAP Subcontract during the three and sixmonths ended June, 30 2009.  Excludingthe MRAP Subcontract activity, the gross profit percentage decreased for thethree and six months ended June 30, 2009 due to costs incurred on theM-ATV Cheetah and manufacturing costs associated with fewer vehicles produced,partially offset with a $2.1 million reduction of a definitization reserve.

 

*Generaland administrative expenses*

* *
| ** **                          | ** ** | **For the  three months ended June 30,** | ** ** | **For the  six months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| General and administrative expenses |       | $                                             | 20,172     |                                        | $          | 21,525 |   | $ | 41,023 |   | $ | 46,150 |   |
| As a percentage of net sales        |       | 10.8                                          | %          | 6.3                                         | %          | 11.0 | % | 6.2 | % |
|                                     |            |                                               |            |                                             |            |  |  |  |  |  |  |  |  |

 

General andadministrative expenses decreased $1.4 million and $5.1 million for the threeand six months ended June 30, 2009 from the comparable 2008 periods.  The $5.1 million decrease for the six monthsended June 30, 2009 from the comparative 2008 period is primarily due tothe $4.9 million impairment charge for certain Roxboro, North Carolina assetsand the $1.5 million contribution to the Medical University of South CarolinaFoundation for brain trauma research, which both occurred in the first quarterof 2008, and the $2.5 million decrease in legal and other service costs, whichoccurred in second quarter of 2009. These decreases were partially offset by $3.2 million of 2006 re-auditcosts during the first quarter of 2009 and the $0.7 million impairment forcertain custom  machines that both wereincurred in the second quarter of 2009.

 

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*Researchand development expenses*

* *
| ** **                        | ** ** | **For the  three months ended June 30,** | ** ** | **For the  six months ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Research and development expenses |       | $                                             | 4,892      |                                        | $          | 3,039 |   | $ | 9,497 |   | $ | 5,899 |   |
| As a percentage of net sales      |       | 2.6                                           | %          | 0.9                                         | %          | 2.6 | % | 0.8 | % |
|                                   |            |                                               |            |                                             |            |  |  |  |  |  |  |  |  |

 

Research and development expenses increased $1.9 million and $3.6million in the three and six months ended June 30, 2009 over thecomparable periods in 2008 primarily due to an increased level of expenditureson the         M-ATV Cheetah and otherprototypes during the three and six months ended June 30, 2009.

 

*Otherincome (expense), net*

 

Other income decreased inthe three and six months ended June 30, 2009, as compared to the 2008periods, due to lower interest income as a result of decreased interest ratescoupled with a $0.3 million and $0.5 million loss on our joint venture withIST, respectively.  See Note 1, *Organization and Description of the Business*,in the accompanying unaudited condensed consolidated financial statements.

 

*Interestincome (expense), net*

 

Interest expense wasrelatively flat for the three and six months ended June 30, 2009, ascompared to the 2008 periods.

 

*Incometax expense*

 

The effective income taxexpense rate for the three and six months ended June 30, 2009 wasapproximately 29% and 34% compared to the effective income tax rate ofapproximately 37% for each of the comparable 2008 periods.  See Note 6,*Income Taxes*, in the accompanyingunaudited condensed consolidated financial statements.

 

*Netincome*

* *
| ** **                            | ** ** | **For the  three months ended June 30,** | ** ** | **For the  six months ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| **(in  thousands, except per share)** | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                            |       | $                                             | 441        |                                        | $          | 8,267 |   | $ | 7,817 |   | $ | 15,304 |   |
| Diluted earnings per share            |       | $                                             | 0.01       |                                        | $          | 0.12 |   | $ | 0.11 |   | $ | 0.22 |   |

 

Net income for the threeand six months ended June 30, 2009 decreased over the comparable 2008 periodsprimarily due to lower gross profit percentages as a result of a decrease inour revenue (including the exclusion of the vehicle revenues from the MRAPSubcontract in the 2008 periods) and higher operating expense percentages.

 

*Backlog*

 

The following table setsforth the number of vehicles included in our backlog as of June 30, 2009and 2008.  The backlog shown in the following table is “funded” backlog,meaning that it reflects vehicles for which we have received orders and forwhich funding has been appropriated and authorized for expenditure by theapplicable customer. We cannot assure you that we will deliver or sell all ofthe vehicles included in our backlog. See Part I, Item 1A, Risk Factors,included in our Annual Report on Form 10-K for the year ended December 31,2008.

 

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| ** **                  | ** ** | **Vehicle  Funded Backlog** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **as of  June 30,**    | ** ** |
| ** **                  | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Buffalo                     |       | 54                          |       | 22 |   |
| Cougar MRAP (Competitive)*  |       | —                      |       | 412 |   |
| Cougar Mastiff              |       | —                      |       | 169 |   |
| Cougar Ridgback             |       | —                      |       | 151 |   |
| Cougar Wolfhound            |       | 94                          |       | — |   |
| Cougar (all other variants) |       | 13                          |       | 9 |   |
| Total                       |       | 161                         |       | 763 |   |

 

----

*  Refers to Cougar vehicles manufactured underthe MRAP Subcontract pursuant to which we and GDLS fulfill the MRAP CompetitiveContract.

 

On July 24, 2009, TACOM awarded us anundefinitized contract modification for the delivery of 48 Buffalo A2 vehicles.The contract has an approximate value of $52.8 million.

 

**Liquidityand Capital Resources**

 

Our liquidity andavailable capital resources are impacted by operating, financing and investingactivities.  Our principal sources of liquidity are cash on hand and cashfrom operations, primarily from the United States government.

 

*Sourcesand Uses of Cash*

 

Our primary sources offunding are cash flows from operations. Our funds were used primarily to fundworking capital requirements and make capital expenditures. The following chartshows the cash flows provided by or used in operating, investing, and financingactivities for the three and six months ended June 30, 2009 and 2008:

 
| ** **                                           | ** ** | **For the  six months ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in  thousands)**                                  | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Net cash provided by (used  in) operating activities |       | $                                           | 18,341     |   | $ | (9,900 | ) |
| Net cash used in investing  activities               |       | (17,436                                     | )          | (8,360 | ) |
| Net cash used in financing  activities               |       | (91                                         | )          | (220 | ) |
| Increase (decrease) in  cash and cash equivalents    |       | $                                           | 814        |   | $ | (18,480 | ) |

 

As of June 30, 2009,we had $111.8 million of cash and cash equivalents, an increase from $111.0million as of December 31, 2008, and an increase from $72.5 million at June 30,2008.

 

*CashFlows from Operating Activities*

 

Cash provided byoperating activities increased by $28.2 million during the first six months of2009 compared with the first six months of 2008.  This change was primarily due to thefollowing significant changes in working capital for the first six months of2009:

 

Working capital assets:

 

(1)          an increase in advances to subcontractor of $26.0million resulting from the advance payment for the  Independent Suspension System (“ISS”) kits;

 

(2)          a net increase in inventories of $52.3 millionresulting primarily from the purchase of raw materials and supplies for theM-ATV Cheetah  vehicles and the Wolfhoundtactical support vehicles and from the increased finished goods balance, whichincludes ForceArmorTM kits, ISS kits, and Wolfhound, Buffalo A2 and M-ATVCheetah vehicles; and

 

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(3)          an increase in prepaid income taxes of $8.9 millionresulting from a federal income tax payment made during the first six months of2009.

 

Working capitalliabilities:

 

(1)          an increase in accounts payable of $37.0 millionprimarily resulting from increased inventory and the timing of purchases andrelated payments;

 

(2)          an increase in the amount due to the United Statesgovernment of $14.6 million, primarily due to increased definitization reserverequirements for vehicles sold under the DoD’s foreign military sales contractsand MRAP-related spare parts sales; and

 

(3)          an increase in advance payments on contracts of $47.4million primarily resulting from customer advances received on contracts forISS kits, ForceArmorTM kits and Cougar Wolfhound vehicles.

 

The majority of our cashreceipts are from the United States government and other foreign governments,and therefore the risk of default on payment of our accounts receivable as of June 30,2009 is very low. However, the deepening global credit crisis and recession inthe United States and western Europe may have an impact on the ability ofUnited States and other governments to continue to fund defense contracts andprograms or could cause them to delay payments to contractors in the future.

 

*CashFlows from Investing Activities*

 

Cash used in investingactivities increased by $9.1 million during the first six months of 2009compared with the first six months of 2008 due to a $10.0 million investment inmarketable securities consisting of held-to-maturity (180-day) treasury billsand a $2.1 million investment in IST, our joint venture with NPA, partiallyoffset by reduced capital expenditures.

 

*CashFlows from Financing Activities*

 

Cash used infinancing activities was relatively flat during the first six months of 2009compared with the first six months of 2008 due to minimal stock optionexercises and a minimal change in other long-term liabilities.

 

*CurrentLiquidity and Capital Resources*

 

Our cash and cashequivalents as of June 30, 2009 were held for working capital purposes andwere invested primarily in short-term United States Treasury bills and moneymarket funds.  Our marketable securitybalance as of June 30, 2009 consisted of an 180-day investment in UnitedStates Treasury bills and was classified as held-to-maturity.  We do not enter into investments for tradingor speculative purposes.

 

During 2008, we expendedapproximately $16.3 million to complete the expansion of our manufacturingcapability and capacity and to upgrade our information technologyinfrastructure.  We do not expect any significant capital expenditures formanufacturing during 2009.

 

The amount of capitalthat we will require depends on several factors, including without limitation,the extent and timing of sales of our products, performance-based payments,inventory costs, costs of raw materials and components, labor costs, costs ofimproving our financial and accounting systems, the timing and costs associatedwith the expansion of our manufacturing, development, engineering and customersupport capabilities, the timing and cost of our product development andenhancement activities and our operating results. We currently estimate thatthe cash flow we anticipate will be generated by our business will be sufficientto meet our presently budgeted capital expenditures and our other presentlyanticipated cash needs for the year ending December 31, 2009.  In addition, we have available to us a$40 million line of credit, which expires on April 30, 2010. Afterthat time, we expect that we may need to obtain additional sources of capital,which may include borrowings or the issuance of debt or equity securities,including common stock, and there can be no assurance that such financing willbe available to us when we need it or, if available, that the terms of any suchfinancing will be satisfactory to us and not dilutive to our shareholders. Anyfailure to obtain necessary capital as and when required could have a materialadverse effect on our business, prospects, financial position, results ofoperations and cash flows.

 

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**Off-BalanceSheet Arrangements**

 

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

 

·                  any obligation under 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 June 30, 2009,we did not have any obligation under certain guarantees or contracts as definedabove.

 

As of June 30, 2009,we did not have any retained or contingent interest in assets as defined above.

 

As of June 30, 2009,we did not hold derivative financial instruments, as defined by FASB Statement No. 133,*Accounting for Derivative Instruments and HedgingActivities,* as amended.

 

As part of our ongoingbusiness, we do not participate in transactions that generate relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities (“SPEs”), whichwould have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. As of June 30,2009 and December 31, 2008, 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 six months ended June 30,2009, there were no significant changes to these obligations as reported in ourAnnual Report on Form 10-K for the year ended December 31, 2008,except that our purchase obligations increased to $177.0 million as of June 30,2009, from $117.5 million as of December 31, 2008.  The increase in purchase obligations as of June 30,2009 was primarily due to purchase orders for approximately $105.3 millionrelated to orders for the Oshkosh ISS kits and approximately $16.5 millionrelated to the M-ATV Cheetah contract.

 

**CriticalAccounting Policies and Estimates**

 

For the quarterly periodended June 30, 2009, 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, 2008 filed with the SEC on March 26,2009.

 

**NewAccounting Pronouncements**

 

For the quarterly periodended June 30, 2009, there were no new accounting pronouncements that weanticipate would have a material effect on our consolidated financial position,results of operations and cash flows since those disclosed in our Annual Reporton Form 10-K for the year ended December 31, 2008 filed with the SECon March 26, 2009.

 

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**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

**CommodityPrices**

 

We are exposed to marketrisk from changes in commodity prices. If the price of steel increasessignificantly, the cost of our products could increase. It is unlikely we willbe able to pass on this cost under our current contracts. As a result, if thecost of our raw materials increases, our profitability, if any, could decrease.

 

**ForeignCurrency**

 

The majority of ourbusiness is denominated in United States dollars and, as such, movement in theforeign currency markets will have a minimal direct impact on our business.

 

**InterestRates**

 

We do not have a tradingportfolio and although our current financing is at a variable rate, we do nothave any borrowings under the arrangement.  As a result, we are notcurrently directly at risk of interest rate fluctuations. As our financingneeds change in the future, interest rate risk may become a more significantissue 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 to leveraged derivatives nor do we hold orissue financial investments for speculative purposes.

 

**Item4. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

In connection with thepreparation of this Quarterly Report on Form 10-Q for the period ended June 30,2009, members of our management, at the direction (and with the participation)of our chief executive officer and chief financial officer, performed anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act), as of June 30, 2009. Based on that evaluation, ourchief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were not effective at a reasonable assurancelevel as of June 30, 2009, because of the material weaknesses in ourinternal control over financial reporting discussed in the Annual Report on Form 10-Kfor the year ended December 31, 2008 filed with the SEC on March 26,2009.

 

Notwithstanding thesematerial weaknesses described in the Annual Report on Form 10-K for theyear ended December 31, 2008, management has concluded that our unauditedcondensed consolidated financial statements included in this report presentfairly, in all material respects, Force Protection’s financial position andresults of operations and cash flows for the periods presented in conformitywith United States generally accepted accounting principles (“GAAP”).

 

Based on our assessmentand the criteria discussed above, our management, including our chief executiveofficer and chief financial officer, concluded that our disclosure controls andprocedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act) were not effective as of June 30, 2009 as a result ofthe following material weaknesses:

 

*Accountingfor revenue recognition*—We did not maintain effective controls over the completeness andaccuracy of revenue, accounts receivable and related reserves. Specifically,effective controls were not designed and in place to ensure that sales orderswere complete, accurate and recorded on a timely basis. Further,reconciliations were not completed in a timely manner to ensure the accuracy ofrevenue recognition.

 

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*Inadequatemonitoring of non-routine and non-systematic transactions* —We did not have effective controls inplace to monitor and accurately record non-routine and non-systematictransactions. During the fourth quarter of 2008, we implemented additionalprocesses for reviewing and monitoring non-routine business activities withinour financial statement close process. These processes have not been in placefor an adequate period of time for us to determine whether this materialweakness has been adequately addressed.

 

**Changesin Internal Control Over Financial Reporting**

 

There were no changes inour internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by thisreport that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Remediationof Remaining Material Weaknesses**

 

As previouslydisclosed under “Item 9A—Controls and Procedures” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008, we concluded that ourinternal control over financial reporting was not effective based on thematerial weaknesses identified.  Duringthe first six months of 2009, we continued our ongoing effort to remediate thetwo material weaknesses that existed as of December 31, 2008.

 

Although there were nosignificant changes in our internal control over financial reporting during thefirst six months of 2009, we have engaged in, and continue to engage in,substantial efforts to improve our internal control over financial reportingand disclosure controls and procedures related to our financial statements anddisclosures. These efforts include the following: strengthening the processesand controls over sales order maintenance and invoicing, timeliness ofreconciliations, and monitoring of revenue, accounts receivable and relatedreserves. This is accomplished with the addition of professional staff with theskills and experience needed for a public company of our size and complexity.

 

Management will considerthe design and operating effectiveness of these actions and will makeadditional changes it determines appropriate.

 

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 aresult, our disclosure controls and procedures and internal control overfinancial reporting may not prevent all errors or improper acts or ensure thatall material information will be made known to appropriate management in atimely fashion.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Shareholder Derivative Complaint

 

As previously reported,between March 27, 2008 and May 28, 2008, various alleged shareholdersfiled derivative lawsuits against former and current officers or board memberswherein the plaintiff shareholders are seeking damages for the Company. TheCompany has been named a nominal defendant in each derivative lawsuit. Fourderivative lawsuits pending in the United States District Court for theDistrict of South Carolina Charleston Division were consolidated on March 31,2009, under the caption “In Re Force Protection, Inc.  Derivative Litigation, Action No. 2:08-cv-01907-CWH”,three derivative lawsuits are pending in Charleston, South Carolina CircuitCourt, and one  derivative lawsuit pending in Clark County, NevadaDistrict Court has been stayed.  The plaintiffs in the derivativelawsuit stayed in Clark County, Nevada re-filed their lawsuit inCharleston, South Carolina Circuit Court on April 9, 2009.  An orderto consolidate the three shareholder derivative actions filed in Charleston,South Carolina Circuit Court was issued by the Court on May 27, 2009.

 

CertainOther Disputes

 

On February 8, 2008,a temporary independent contractor whose services we had terminated filed acomplaint with OSHA which alleges a violation under the employee protectionprovisions of Section 806 of the Corporate and Criminal FraudAccountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18U.S.C. §1514A. The 

 

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former independentcontractor alleges that we terminated his engagement in retaliation for hisallegation of certain corporate governance, government contracting, accountingand other irregularities. On April 18, 2008, we responded to theallegations. In August 2008 the claimant submitted a proposed amendedcomplaint which sought to add additional claims and the current and formerchief executive officers as defendants. On October 2, 2008, ForceProtection and individuals submitted a further response. On November 20,2008, the claimant exercised his rights under Section 806 to withdraw hisclaim from the Department of Labor, stating that he had decided instead topursue his claims in a lawsuit in federal district court. As a result of theclaimant’s election, the Department of Labor terminated its processing of thematter at that time. On June 26, 2009 a lawsuit was filed by theindividual against the Company in the United States District Court for theDistrict of South Carolina, Charleston Division as Civil Action No. 2:09cv1708-DCN-BM.

 

On or about June 17,2009, ASG Renaissance filed a demand for arbitration against Force ProtectionIndustries, Inc., bearing the caption *ASG Renaissance v. Force ProtectionIndustries, Inc.*, No. 31 132 Y 00256 09, with the AmericanArbitration Association.  Both ASG andForce Protection alleged breach of contract among other requests forrelief.  On July 13, 2009, wesettled this matter for $325,000 and reversed the accrual, which was includedin *Total current liabilities* as of June 30,2009.

 

In connection with oursuit against Protected Vehicles, Inc. (“PVI”) and three of PVI’semployees as disclosed in the section entitled “Legal Proceedings” inItem 3, Part I of our Annual Report on Form 10-K for the year ended December 31,2008, as of February 2, 2009 Force Protection Industries, Inc. andForce Protection, Inc. had entered into a settlement agreement withdefendants, including the third-party purchaser of the bulk of PVI’s assets(which includes certain rights and liabilities with respect to our suit againstit), in which the defendants agreed to identify and return all our property andrefrain from using it in the future, and agreed to dismiss all claims againstus.   As of June 4, 2009, we enteredinto a supplemental agreement with the third party purchaser in which thatpurchaser agreed to pay us $160,000 in exchange for a covenant not to sue forits continued use of certain files on PVI devices that were to have beenidentified and returned under the February 2, 2009 agreement.

 

Although we intend todefend ourselves in connection with the foregoing legal proceedings and claimsand the legal proceedings set forth in Part I, Item 3 of our Annual Reporton Form 10-K for the year ended December 31, 2008, there can be noassurance that we will ultimately prevail in any of these matters.  Moreover, the defense of these claims andproceedings may result in substantial legal expenses and diversion of ourmanagement, and any settlement or adverse judgment may require us to makesubstantial payments, any of which could have a material adverse effect on ourbusiness or financial position, results of operations, or cash flows.

 

We are also a party toother litigation which we consider routine and incidental to our business. Wemay be involved from time to time in other litigation that could have amaterial effect on our operations or finances. Other than the litigationdescribed above and in Part I, Item 3 of our Annual Report on Form 10-Kfor the year ended December 31, 2008, we are not aware of any pending orthreatened litigation against us that could have a material adverse effect onour business or financial position, results of operations, or cash flows.

 

**Item1A. Risk Factors**

 

In addition to the otherinformation set forth in this Quarterly Report on Form 10-Q and the riskfactors discussed below, you should carefully consider the risk factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2008 filed with the SEC on March 26,2009, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not theonly 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.

 

# ***We areexpanding international operations, the conduct of which subjects us to risksthat may have a material adverse effect on our business.***

# ** **

Expandinginternational sales and operations is a part of our growth strategy.  In the second quarter of 2009, through our50% owned joint venture, IST, we received awards from the United KingdomMinistry of Defence, and we began operations in the United Kingdom.  In March 2009, IST executed an officelease in Bristol, United Kingdom and in May 2009 Force ProtectionIndustries, Inc. signed an agreement to sublease a vehicle supportfacility in Kuwait.  Internationaloperations and sales are subject to various risks, including political,religious and economic instability, local labor market conditions, theimposition of foreign tariffs and other trade barriers, the 

 

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impact of foreigngovernment regulations and the effects of income and withholding taxes,governmental expropriation and differences in business practices. We may incurincreased costs and experience delays or disruptions in product deliveries andpayments in connection with international manufacturing and sales that couldcause loss of revenues and earnings. In addition, we are increasingly subjectto export control regulations, including, without limitation, the United StatesExport Administration Regulations and the International Traffic in ArmsRegulations. Unfavorable changes in the political, regulatory and businessclimate could have a material adverse effect on our net sales, financialcondition, profitability and/or cash flows.

 

***Our limited control over our joint ventures andsubcontractors may delay or prevent us from implementing our business strategywhich may adversely affect our financial results.***

 

We are currently aparty to a joint venture arrangement with NP Aerospace and a subcontractarrangement with GDLS for the award and production of our vehicles.  We may also enter into additional jointventures or similar subcontract arrangements in the future, and some of ourpartners may also be our competitors. Pursuant to the terms of IST, our joint venture with NP Aerospace, weshare control over significant decisions with our joint venture partner.  For example, in connection with the contractawarded to IST, NP Aerospace, our joint partner, and other United Kingdomsubcontractors will perform services and or supply goods for the completion ofthe Wolfhound, including but not limited to program management, systemengineering design, integration, armor supply and commissioning and installingarmor equipment.  Because we have sharedcontrol over our joint venture and may not be able to exercise control over anyfuture joint venture, we may not be able to require our partners to takeactions that we believe are necessary to implement our business strategy.Accordingly, this limited control could have a material adverse effect on ourfinancial results.

 

Under some of ourjoint venture agreements, we may be jointly and severally liable to customersfor the performance of the entire contract and any non-performance by ourpartners or subcontractors in the project is our responsibility. If our partneror subcontractor in such arrangement fails to fulfill its obligations, we couldbe required to carry the resultant liability to the customer and would have torely on our ability to obtain reimbursement from our project partner orsubcontractor for our costs, over and above the reimbursement from the customer.Obtaining such reimbursement could require us to engage in litigation and couldtake a substantial amount of time and could require us to expend significantresources. If our partner or subcontractor becomes insolvent or ceasesoperations, we might not be able to obtain reimbursement.  We also face risks through our equity methodinvestments in companies that we do not control.

 

***We have started the manufacture and production of certain of ourproducts for which we have no orders. If we do not receive orders for thoseproducts, we may incur losses and be required to write-off significant amounts.***

 

At times, if we believe that there is a probability of selling certainof our vehicles or products, we may commence the manufacture and production ofsuch items without orders.  We have inthe past, and may do so in the future, commence the manufacture and productionof our vehicles and products, and incur expenses for components, raw materials,and other expenses without any orders from customers to purchase the vehiclesand products we manufacture.  We mayexperience difficulties, expenses and delays in starting up production forthese vehicles if we have no prior experience in manufacturing such vehiclesand products in commercial quantities and it may take a substantial period oftime for us and our employees to achieve requisite efficiencies in producingsuch vehicles.  In the event that we donot receive orders for these vehicles or products, we may have excess inventoryand incur losses, and, as a result, our business, financial position, resultsof operations, or cash flows may be affected.

 

During the six monthsended June 30, 2009, we began to procure materials and fabricate parts forthe manufacture of approximately 50 M-ATV Cheetah vehicles in anticipation ofreceiving orders from TACOM pursuant to the M-ATV competition.  On June 30, 2009, we were informed byTACOM that our M-ATV Cheetah was not selected for the M-ATV competition.  As a result, we have incurred expenses forcomponents, materials, and other expenses related to the procurement,fabrication and initial production of approximately 50 M-ATV Cheetah vehicleswithout any orders from customers to purchase these vehicles.  Because we are actively pursuing opportunitieswith potential customers to purchase these M-ATV Cheetah vehicles, which are invarious stages of production, we currently include these items in our inventoryand have not recognized a loss for these vehicles.  However, to the extent that we do not receiveorders for the M-ATV Cheetah from another customer in significant quantities wemay be required to write-off some or all of these costs and our business,prospects, results of operations, cash flows and financial position may beaffected.

 

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

 

**Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

 

The following table setsforth purchases of our common stock for the three months ended June 30,2009:

 
| **Period**                                | ** ** | **(a) Total Number  of  Shares Purchased** | ** ** | **(b) Average  Price  Paid Per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced   Plans or Programs** | ** ** | **(d)  Maximum  Number of Shares  that May Yet Be  Purchased   Under the   Plans or Programs** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| April 1,  2009 - April 30, 2009 |       | 2,788                                           |       | $                                           | 7.23       |                                                                                                    | —     |                                                                                                     | —     |   |
|                                           |            |                                                 |            |                                             |            |                                                                                                         |            |                                                                                                          |            |  |

 

Pursuant to a restrictedstock award dated November 21, 2008 between Force Protection, Inc.and Daniel Busher, our former Executive Vice President, Operations, Mr. Busherwas granted 25,000 shares of our common stock, which vested in three equalannual installments commencing on November 21, 2009, with the finalinstallment due to vest on November 21, 2011.  Pursuant to his severance arrangements, thefirst installment of vesting of 8,333 shares was accelerated to April 13,2009.  In order to comply with hisminimum statutory federal and state tax withholding taxes plus Medicare, Mr. Bushersurrendered a portion of his vested shares, representing 33.5% of the totalvalue of the shares then vested, to Force Protection, Inc. in connectionwith his withholding obligations.

 

**Item3. Defaults Upon Senior Securities**

 

None.

 

**Item4. Submission of Matters to a Vote of Security Holders**

 

Weheld our 2009 Annual Meeting of Shareholders on May 15, 2009. Ourshareholders approved each of the following proposals, which were all theproposals presented at the meeting, by the votes specified below.

 

Proposal No. 1—The election of three nominees as Class IDirectors to the Board of Directors for a term of three years.

 
| **Nominee**                               | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Percentage** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|
| Major General Jack A.  Davis, USMC (Ret.) |       | 60,696,089 |       | 885,701      |       | 98.6           | %          |
| Kenneth Merlau                            |       | 60,727,305 |       | 854,485      |       | 98.6           | %          |
| B. Herbert Ellis                          |       | 60,703,300 |       | 878,490      |       | 98.6           | %          |

 

After the 2009 Annual Meeting of Shareholders, Michael Moody and Lieutenant General Roger G. Thompson, Jr.,USA (RET.) continued their terms as Class II Directors serving until the2010 Annual Meeting of Shareholders and John S. Day and John W. Paxton, Sr.continued their terms as Class III Directors serving until the 2011 AnnualMeeting of Shareholders.

 

Proposal No. 2—The ratification of the Audit Committee’s appointment of GrantThornton LLP, as Force Protection, Inc.’s independent registeredpublic accounting firm for the fiscal year ended December 31, 2009.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 61,209,113 |       | 274,249     |       | 98,432      |       |

 

**Item5. Other Information**

 

None.

 

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**Item 6. 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,please remember they are included to provide you with information regardingtheir terms and are not intended to provide any other factual or disclosureinformation about Force Protection or the other parties to the agreements. Someof the agreements contain representations and warranties by each of the partiesto the applicable agreement. These representations and warranties have beenmade solely for the benefit of the other parties to the applicable agreementand:

 

· 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;

 

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

 

· May apply standards 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 aboutForce Protection, Inc. may be found elsewhere in this Quarterly Report on Form 10-Qand Force Protection’s other public filings, which are available without chargeon Force Protection, Inc.’s website at *www.forceprotection.net*.

 
| **NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                           |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                      |
| 2.1        |       | Agreement and  Plan of Merger, filed as Exhibit 2.1 to the Company’s Annual Report on  Form 10-K filed September 15, 2008, is hereby incorporated by  reference.                                      |
|       |       |                                                                                                                                                                                                                      |
| 3.1        |       | Restated Articles of  Incorporation, filed as Exhibit 3.1 to the Company’s Quarterly Report on  Form 10-K filed May 11, 2009, is hereby incorporated by reference.                                    |
|       |       |                                                                                                                                                                                                                      |
| 3.2        |       | Certificate of  Amendment to Articles of Incorporation, filed as Exhibit 3.1 to the Company’s  Current Report on Form 8-K filed November 26, 2008, is hereby  incorporated by reference.              |
|       |       |                                                                                                                                                                                                                      |
| 3.3        |       | Certificate of  Correction to Restated Articles of Incorporation, filed as Exhibit 3.3  to the Company’s Quarterly Report on Form 10-Q filed May 11, 2009,  is hereby incorporated by reference.      |
|       |       |                                                                                                                                                                                                                      |
| 3.4        |       | Second Amended and  Restated By-Laws of Force Protection, Inc., filed as Exhibit 3.2 to  the Company’s Current Report on Form 8-K filed November 26, 2008,  is hereby incorporated by reference. |
|       |       |                                                                                                                                                                                                                      |
| 4.1        |       | Certificate of  Withdrawal for Series B Convertible Preferred Stock. †                                                                                                                                          |
|       |       |                                                                                                                                                                                                                      |
| 4.2        |       | Certificate of  Withdrawal for Series C Convertible Preferred Stock. †                                                                                                                                          |
|       |       |                                                                                                                                                                                                                      |
| 4.3        |       | Certificate of  Withdrawal for Series D Convertible Preferred Stock. †                                                                                                                                          |
|       |       |                                                                                                                                                                                                                      |
| 10.1       |       | Severance  Agreement with Randy Hutcherson dated April 7, 2009, filed as an  Exhibit to the Company’s Current Report on Form 8-K filed  April 10, 2009, is hereby incorporated by reference.     |

 

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| 10.2   |   | Teaming  Agreement, dated as of April 7, 2009 between Force Protection  Industries, Inc. and Oshkosh Corporation. †*                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                              |
| 10.3   |   | Severance Agreement  with James Grazioplene dated May 4, 2009, filed as an Exhibit to  the Company’s Current Report on Form 8-K filed May 8, 2009, is  hereby incorporated by reference. |
|   |   |                                                                                                                                                                                                              |
| 10.4   |   | Form of  Indemnification Agreement, filed as Exhibit 10.2 to the Company’s 8-K  filed April 10, 2009, is hereby incorporated by reference.                                                    |
|   |   |                                                                                                                                                                                                              |
| 10.5   |   | Contract Modification  under Contract No. M67854-07-D-5031 with the United States Marine Corps  Systems Command, dated April 8, 2009. † *                                                          |
|   |   |                                                                                                                                                                                                              |
| 31.1   |   | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. †                                                                                             |
|   |   |                                                                                                                                                                                                              |
| 31.2   |   | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. †                                                                                             |
|   |   |                                                                                                                                                                                                              |
| 32.1   |   | Certification of  Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. †                                                            |

 

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

 

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

 

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** **

**SIGNATURES**

 

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

 
| ** **                  | **FORCE  PROTECTION, INC.***(Registrant)* |
|-----------------------------|-------------------------------------------|
| ** **                  | ** **                                |
| * *                    | * *                                  |
| Date: August 10,  2009 | By:                                       | /s/ MICHAEL MOODY |
|                        | ** **                                | **Name:** | **Michael  Moody** |
|                        | ** **                                | **Title:** | **President  and Chief Executive Officer** |
|                        | ** **                                | ** ** | **(principal  executive officer)** |
| ** **                  | ** **                                | ** ** |
| ** **                  | ** **                                | ** ** |
| Date: August 10,  2009 | By:                                       | /s/ CHARLES MATHIS |
|                        | ** **                                | **Name:** | **Charles  Mathis** |
|                        | ** **                                | **Title:** | **Chief  Financial Officer** |
|                        | ** **                                | ** ** | **(principal  financial and accounting officer)** |

 

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