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 March 31, 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 hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the 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“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

The registrant had69,948,991 shares of common stock outstanding as of May 8, 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 March 31,  2009** | ** ** | **As of December 31,  2008** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **(In Thousands)**             | ** ** |
| **Assets**                                           |       |                           |       |                              |       |
| **Current  assets:**                                 |       |                           |       |                              |       |
| Cash and cash  equivalents                           |       | $                              | 119,830    |                              | $          | 111,001 |   |
| Accounts  receivable, net                            |       | 152,377                        |       | 138,449                           |       |
| Inventories                                          |       | 100,508                        |       | 88,502                            |       |
| Deferred income  tax assets                          |       | 13,481                         |       | 15,572                            |       |
| Prepaid income  taxes                                |       | 10,324                         |       | —                            |       |
| Other current  assets                                |       | 2,704                          |       | 2,417                             |       |
| Total current  assets                                |       | 399,224                        |       | 355,941                           |       |
| Property and  equipment, net                         |       | 61,589                         |       | 61,429                            |       |
| Investment in  joint venture                         |       | 1,925                          |       | —                            |       |
| Intangible  assets, net                              |       | 503                            |       | 654                               |       |
| **Total  assets**                                    |       | $                              | 463,241    |                              | $          | 418,024 |   |
|                                                 |       |                           |       |                              |       |
| **Liabilities and Shareholders’ Equity**        |       |                           |       |                              |       |
| **Current  liabilities:**                            |       |                           |       |                              |       |
| Accounts payable                                     |       | $                              | 55,553     |                              | $          | 47,115 |   |
| Due to United  States government                     |       | 58,418                         |       | 39,015                            |       |
| Advance payments  on contracts                       |       | 43,734                         |       | 29,504                            |       |
| Other current  liabilities                           |       | 15,149                         |       | 20,783                            |       |
| Total current  liabilities                           |       | 172,854                        |       | 136,417                           |       |
| Deferred income  tax liabilities                     |       | 4,352                          |       | 3,141                             |       |
| Other long-term  liabilities                         |       | —                         |       | 139                               |       |
|                                                 |       | 177,206                        |       | 139,697                           |       |
| Commitments and  contingencies                       |       |                           |       |                              |       |
| ** **                                           |       |                           |       |                              |       |
| **Shareholders’  equity:**                      |       |                           |       |                              |       |
| Common stock                                         |       | 69                             |       | 68                                |       |
| Additional  paid-in capital                          |       | 257,270                        |       | 256,939                           |       |
| Retained  earnings                                   |       | 28,696                         |       | 21,320                            |       |
| Total  shareholders’ equity                     |       | 286,035                        |       | 278,327                           |       |
| **Total  liabilities and shareholders’ equity** |       | $                              | 463,241    |                              | $          | 418,024 |   |

 

The accompanyingnotes to condensed consolidated financial statements are an integral part ofthese statements.

 

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**ForceProtection, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                       | ** ** | **For the  three months ended  March 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(In Thousands, Except Per Share Data)**       | ** ** |
| Net sales                                        |       | $                                               | 184,734    |   | $ | 403,047 |   |
| Cost of sales                                    |       | 147,832                                         |       | 364,716 |   |
| Gross profit                                     |       | 36,902                                          |       | 38,331 |   |
| General and  administrative expenses             |       | 20,851                                          |       | 24,625 |   |
| Research and  development expenses               |       | 4,605                                           |       | 2,860 |   |
| Operating income                                 |       | 11,446                                          |       | 10,846 |   |
| Other income  (expense), net                     |       | (62                                             | )          | 511 |   |
| Interest expense                                 |       | (136                                            | )          | (125 | ) |
| Income before  income tax expense                |       | 11,248                                          |       | 11,232 |   |
| Income tax  expense                              |       | (3,872                                          | )          | (4,195 | ) |
| Net income                                       |       | 7,376                                           |       | 7,037 |   |
| **Earnings  per common share:**                  |       |                                            |       |   |   |
| Basic                                            |       | $                                               | 0.11       |   | $ | 0.10 |   |
| Diluted                                          |       | $                                               | 0.11       |   | $ | 0.10 |   |
| **Weighted  average common shares outstanding:** |       |                                            |       |   |   |
| Basic                                            |       | 68,408                                          |       | 68,297 |   |
| Diluted                                          |       | 68,755                                          |       | 68,363 |   |

 

The accompanyingnotes to condensed consolidated financial statements are an integral part ofthese statements.

 

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**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                               | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| ** **                                                                               | ** ** | **(In Thousands)**                            | ** ** |
| **Cash  flows from operating activities:**                                               |       |                                          |       |   |   |
| Net income                                                                               |       | $                                             | 7,376      |   | $ | 7,037 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities – |       |                                          |       |   |   |
| Depreciation and  amortization                                                           |       | 3,237                                         |       | 2,986 |   |
| Deferred income  tax provision                                                           |       | 3,302                                         |       | 1,227 |   |
| Stock-based  compensation                                                                |       | 315                                           |       | 33 |   |
| Allowance for  doubtful accounts                                                         |       | —                                        |       | 79 |   |
| Provision for  asset impairment                                                          |       | —                                        |       | 4,947 |   |
| Provision for  inventory obsolescence                                                    |       | 210                                           |       | 2,837 |   |
| Loss from joint  venture                                                                 |       | 205                                           |       | — |   |
| (Increase)  decrease in assets –                                                    |       |                                          |       |   |   |
| Accounts  receivable                                                                     |       | (13,928                                       | )          | (28,103 | ) |
| Inventories                                                                              |       | (12,216                                       | )          | 2,758 |   |
| Advances to  subcontractor                                                               |       | —                                        |       | 147 |   |
| Prepaid income  taxes                                                                    |       | (10,324                                       | )          | 2,968 |   |
| Other current  assets                                                                    |       | (287                                          | )          | (2,515 | ) |
| Increase  (decrease) in liabilities –                                               |       |                                          |       |   |   |
| Accounts payable                                                                         |       | 8,273                                         |       | 15,327 |   |
| Due to United  States government                                                         |       | 19,403                                        |       | — |   |
| Other current  liabilities                                                               |       | (5,643                                        | )          | 1,056 |   |
| Advance payments  on contracts                                                           |       | 14,230                                        |       | (7,655 | ) |
| Total  adjustments                                                                       |       | 6,777                                         |       | (3,908 | ) |
| **Net  cash provided by operating activities**                                           |       | 14,153                                        |       | 3,129 |   |
| **Cash  flows from investing activities:**                                               |       |                                          |       |   |   |
| Capital  expenditures                                                                    |       | (3,081                                        | )          | (6,181 | ) |
| Investment in  joint venture                                                             |       | (2,130                                        | )          | — |   |
| **Net  cash used in investing activities**                                               |       | (5,211                                        | )          | (6,181 | ) |
| **Cash  flows from financing activities:**                                               |       |                                          |       |   |   |
| Proceeds from  issuance of common stock                                                  |       | 15                                            |       | — |   |
| Net decrease in  other long-term liabilities                                             |       | (128                                          | )          | (167 | ) |
| **Net  cash used in financing activities**                                               |       | (113                                          | )          | (167 | ) |
| **Increase  (decrease) in cash and cash equivalents**                                    |       | 8,829                                         |       | (3,219 | ) |
| **Cash  and cash equivalents at beginning of year**                                      |       | 111,001                                       |       | 90,997 |   |
| **Cash  and cash equivalents at end of period**                                          |       | $                                             | 119,830    |   | $ | 87,778 |   |
| **Supplemental  cash flow information:**                                                 |       |                                          |       |   |   |
| Cash paid during  the period for                                                         |       |                                          |       |   |   |
| Interest, net of  amounts capitalized                                                    |       | $                                             | 22         |   | $ | 132 |   |
| Income taxes                                                                             |       | $                                             | 15,101     |   | $ | 31 |   |
| **Supplemental  schedule of noncash investing and financing activities:**                |       |                                          |       |   |   |
| Property and  equipment additions in accounts payable                                    |       | $                                             | 438        |   | $ | — |   |

 

The accompanyingnotes to condensed consolidated financial statements are an integral part ofthese statements.

 

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**1.**    **Summary of Significant Accounting Policies**

** **

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

*** ***

Force Protection, Inc.,reincorporated under the laws of Nevada in 2005, and its subsidiaries, is aprovider of blast- and ballistic-protected products used to support armedforces and security personnel in harm’s way.  We design, manufacture,test, deliver and support our blast- and ballistic-protected products with thepurpose to increase survivability of the users of the products.  Ourspecialty vehicles, which we believe are the forefront of blast- andballistic-protected technology, are designed to protect their occupants fromlandmines, hostile fire, and improvised explosive devices (“IEDs”).  Weare a key provider of vehicles to the United States military under the MineResistant Ambush Protected (“MRAP”) program. Our customers include all branchesof the United States Department of Defense (“DoD”) and through foreign militarysales of the DoD, military customers located in the United Kingdom, Iraq,Canada, Italy, and France.

 

IntegratedSurvivability Technologies Limited, an England and Wales company (“IST”), is ajoint venture between Force Protection Advanced Solutions Limited (“FPAS”), asubsidiary of Force Protection Industries, Inc., and NP Aerospace Limited,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. The vehiclesdelivered by IST will be based on the version of our Wolfhound, Buffalo,Mastiff and Ridgback vehicles. Force Protection and NP Aerospace Limitedeach own a 50% interest in IST and the board of IST consists of six members,three of whom are appointed by Force Protection.  Pursuant to the joint venture, IST willcontract with Force Protection Industries, Inc., a subsidiary of ForceProtection, Inc., for the delivery of the vehicles to IST. As of March 31,2009, we have contributed $2.1 million for this investment in IST.   Our current contract with IST calls for anadditional capital contribution on July 6, 2009. However, we do notanticipate that an additional contribution will be required at such time.  We account for this joint venture as anequity-method investment.

 

Force Dynamics,LLC, a joint venture between Force Protection, Inc. and General DynamicsLand Systems, Inc. (“GDLS”), distributes blast- and ballistic-protectedvehicles. Force Dynamics currently offers the Cheetah M-ATV, a highly versatileCheetah vehicle designed for use in challenging terrain environments, andreceived its first award in March of 2009. Force Protection and GDLS each own a 50% interest in Force Dynamics andthe board of Force Dynamics consists of six members, three of whom areappointed by Force Protection.  Allfuture contracts awarded to Force Dynamics, pursuant to the M-ATV contract,will be wholly subcontracted to each of Force Protection and GDLS pursuant to50/50 work share allocation at the revenue level. We account for thisjoint venture as an equity-method investment.

 

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

 

***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 condensedconsolidated financial statements recognize all adjustments of a normalrecurring nature considered necessary to fairly state the financial position,results of operations and cash flows for each interim period presented.

 

These unaudited condensedconsolidated financial statements include the assets, liabilities, revenues andexpenses of our 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.

 

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Certain prior periodinformation has been reclassified to conform to the current period presentation.

 

***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 is 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.

 

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 and 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 partial adoption ofFASB Statement No. 157, including FSP FAS No. 157-2, during thefirst quarter of 2009, with respect to financial assets and financialliabilities recognized or disclosed at fair value in the consolidated financialstatements on a recurring basis, did not have a material impact on ourconsolidated financial statements.

 

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 March 31,** | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2009**                 | ** ** | **2008**                    | ** ** |
| United States  government  |       | $                        | 143,303    |                        | $          | 114,230 |   |
| Other accounts  receivable |       | 9,074                    |       | 24,219                      |       |
| Accounts  receivable, net  |       | $                        | 152,377    |                        | $          | 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 March 31, 2009 and December 31, 2008, ouraccounts receivable from the United States government included $14.1 millionand $8.6 million, respectively, of earned and unbilled accounts receivable.

 

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**3.**    **Inventories**

 

Inventories consist ofthe following (in thousands):

 
| ** **                 | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2009**                 | ** ** | **2008**                    |       |
| Raw material and  supplies |       | $                        | 74,267     |                        | $          | 64,857 |   |
| Work in process            |       | 23,355                   |       | 23,645                      |       |
| Finished goods             |       | 2,886                    |       | —                      |       |
| Inventories                |       | $                        | 100,508    |                        | $          | 88,502 |   |

 

Due to excess andobsolete inventory and to account for our inventory at the lower of cost ormarket, we reduced the cost basis of our raw material and supplies and chargedto*Cost of sales* $0.2 millionduring the three-month period ended March 31, 2009.

 

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

** **

Property and equipmentconsist of the following (in thousands):

 
| ** **                                            | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **2009**                 | ** ** | **2008**                    | ** ** |
| Land                                                  |       | $                        | 4,419      |                        | $          | 4,419 |   |
| Buildings and  building improvements                  |       | 12,753                   |       | 12,669                      |       |
| Leasehold  improvements                               |       | 14,334                   |       | 13,988                      |       |
| Machinery and  equipment; including tooling and molds |       | 32,983                   |       | 32,421                      |       |
| Computer  equipment and software                      |       | 10,516                   |       | 9,062                       |       |
| Furniture and  fixtures                               |       | 3,455                    |       | 3,580                       |       |
| Demonstration  vehicles                               |       | 1,863                    |       | 1,863                       |       |
| Manuals                                               |       | 705                      |       | 705                         |       |
| Vehicles                                              |       | 676                      |       | 676                         |       |
|                                                  |       | $                        | 81,704     |                        | $          | 79,383 |   |
| Less:  Accumulated depreciation                       |       | (21,769                  | )          | (18,683                     | )          |
|                                                  |       | 59,935                   |       | 60,700                      |       |
| Construction in  progress                             |       | 1,654                    |       | 729                         |       |
| Property and  equipment, net                          |       | $                        | 61,589     |                        | $          | 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.

 

During 2008, we completedthe renovation of our Roxboro facility and capitalized costs as buildingimprovements of approximately $5.8 million. We will use the Roxborofacility for training purposes beginning in late May 2009.

 

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

** **

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

 

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| ** **                                                  | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **2009**                 | ** ** | **2008**                    |       |
| Mine Resistant  Ambush Protected (“MRAP”) program |       | $                        | 42,091     |                        | $          | 29,504 |   |
| Iraqi Light  Armored Vehicles (“ILAV”)            |       | 1,243                    |       | —                      |       |
| Other                                                       |       | 400                      |       | —                      |       |
| Advance payments  on contracts                              |       | $                        | 43,734     |                        | $          | 29,504 |   |

 

Under some of our United States government contracts, we receiveperformance-based payments based on completion of specific milestonesstipulated under the contract (for example, completion of manufacturingfabrication). We report these payments as*Advance payments on contracts* in our consolidated balance sheetuntil the final delivery of the products and formal acceptance by the UnitedStates 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 tax rateexpected to be applicable for the full year, adjusted for the impact of anydiscrete 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 months ended March 31, 2009 was based onthe estimated effective tax rates applicable for the fiscal year ending December 31,2009, after considering items specifically related to the interim period.  The income tax expense for the three-monthperiod ended March 31, 2008 was based on the estimated effective tax ratesapplicable for the fiscal year ended December 31, 2008, after consideringitems specifically related to the interim period.

 

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

 

 
| ** **                        | ** ** | **For the three months ended  March 31,** |       |
|-----------------------------------|------------|------------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                       | ** ** | **2008** |   |
| Income before  income tax expense |       | $                                              | 11,248     |   | $ | 11,232 |   |
|                                   |            |                                                |            |  |  |  |  |

 

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

 
|                                             |   | **For the three months ended  March 31,** |   |
|--------------------------------------------------|--------|------------------------------------------------|--------|
|                                             |   | **2009**                                       |   | **2008** |   |
| Income tax  expense at statutory rate            |   | 35.00                                          | %      | 35.00 | % |
| (Increase)  decrease in tax rate resulting from: |   |                                           |   |   |   |
| State income  taxes, net of federal tax benefit  |   | 0.70                                           | %      | 1.93 | % |
| Research and  development credit                 |   | (2.60                                          | )%     | — |   |
| Domestic  Production Activities Deduction        |   | (0.32                                          | )%     | — |   |
| Other permanent  differences                     |   | —                                         |   | (0.82 | )% |
| Nondeductible  items                             |   | 1.65                                           | %      | 1.24 | % |
| Effective income  tax expense rate               |   | 34.43                                          | %      | 37.35 | % |

 

9

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The effective income taxrate is the provision for income tax expense as a percent of income beforeincome taxes. The 2009 effective rate is lower than the expected federalstatutory rate of 35% due to research and development tax credits and theDomestic Production Activities Deduction, partially offset by state incometaxes 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 and 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 aresult of applying the guidance in FASB Interpretation 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  March 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| **Numerator  – Basic and diluted:**                   |       |                                           |       |   |   |
| Net income                                                 |       | $                                              | 7,376      |   | $ | 7,037 |   |
| **Denominator:**                                           |       |                                           |       |   |   |
| Weighted average  common shares outstanding – basic   |       | 68,407,606                                     |       | 68,297,100 |   |
| Add:  Stock  options                             |       | 69,770                                         |       | 27,028 |   |
| Add:  Stock  grants                              |       | 277,580                                        |       | 39,152 |   |
| Weighted average  common shares outstanding – diluted |       | 68,754,956                                     |       | 68,363,280 |   |
| **Basic  earning per common share:**                       |       |                                           |       |   |   |
| Net income – basic                                    |       | $                                              | 0.11       |   | $ | 0.10 |   |
| **Diluted  earning per common share:**                     |       |                                           |       |   |   |
| Net income – diluted                                  |       | $                                              | 0.11       |   | $ | 0.10 |   |

 

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, wehave not excluded any potentially dilutive shares from the calculation ofdiluted 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. Borrowings under the original credit agreementbore interest at a floating rate per annum equal to the one-month LondonInterbank Offered Rate (“LIBOR”) plus 2.0%. The original amount of theagreement was $50 million and all amounts payable under this credit agreementwere originally due and payable on 

 

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September 30, 2007.We have entered into several modification agreements with the lender to reducethe 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 LIBORplus an additional amount (“Applicable Margin”) of 1.75%. Beginning with thequarter starting April 1, 2009, the Applicable Margin will be determinedquarterly based on the Funded Debt to EBITDA ratio calculated on a rolling fourquarter basis and will vary 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 personalproperty, as defined in the credit agreement. Since its inception through thedate of this filing, we have not borrowed any amounts under the creditagreement.

 

*Legal Proceedings*

* *

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.  Motions toconsolidate the three shareholder derivative actions filed in Charleston, SouthCarolina Circuit Court are currently pending before the Court.

 

CertainOther Disputes

 

On November 13,2007, the Company was served with a lawsuit filed by a former senior employeeagainst Force Protection Inc., Force Protection Industries, Inc. andformer Force Protection officers. The complaint, filed in the Charleston (SouthCarolina) County Court of Common Pleas, alleged, among other things, that theformer employee was owed warrants of approximately 83,000 shares of our commonstock and certain back wages and set forth claims for, *inter alia*, breach of contract, violationof the South Carolina Payment of Wages Act, retaliatory wrongful discharge, anddefamation. We answered the complaint on January 25, 2008. On March 13,2009, we entered into a confidential settlement of this matter and the lawsuithas been dismissed with prejudice.

 

On August 15, 2008,we received a $1.1 million notice of claim of lien for the balance oftooling supplied by a vendor to our prime contractor on the Roxboro, NorthCarolina Facility. We demanded that the prime contractor resolve this matterwith its vendor and indemnify us for this claim of lien.  On March 31, 2009, we settled thismatter for $120,000.

 

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 

 

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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.

 

**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

 

·                  OurBusiness

·                  BusinessModel and Key Concepts

·                  KeyChallenges

·                  Strategyand Key Trends

 

·                  Resultsof Operations—an analysis of our consolidated results of operations, for thethree-month periods presented in our unaudited condensed consolidated financialstatements

 

·                  Liquidityand Capital Resources—an analysis of the effect of our operating, financing andinvesting activities on our liquidity and capital resources

 

·                  Off-BalanceSheet Arrangements—a discussion of such commitments and arrangements

 

·                  ContractualObligations—a summary of our aggregate contractual obligations

 

·                  CriticalAccounting Policies and Estimates—a discussion of accounting policies thatrequire significant judgments and estimates

 

·                  NewAccounting Pronouncements—a summary and discussion of our plans for theadoption of new accounting standards relevant 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 (“ExchangeAct”).  All statements other than statements of historical fact includedin this Quarterly 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:

 

·                  statementsregarding the growth of the United States and world market for blast- andballistic-protected vehicles and survivability solutions;

 

·                    statementswith respect to our expectation regarding our ability to obtain materials,components and supplies necessary to manufacture our vehicles, our ability toimprove cost efficiencies, including, without limitation, as a result of volumepurchasing, improvements in our manufacturing process and possible futurechanges in the efficiencies in our operations;

 

·                    statementsregarding any changes in our cost of sales, our general and administrativeexpenses or our research and development expenses;

 

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·                    statementsregarding the revenues that may be derived from, and the quantities of vehiclesthat may be purchased or ordered pursuant to, existing or possible futurecontracts or orders by various customers, including statements regarding theestimated value of those orders and contracts and statements about the amountof vehicles in our backlog and the value of our backlog;

 

·                    statementsregarding our ability to rebalance our work force to meet the demand for ourvehicles, including the effectiveness of the utilization of partners andsubcontractors;

 

·                    statementsregarding our plans for the use of our product development and productionfacilities; and

 

·                    statementsregarding the rate at which we produce our vehicles, including orders for ourCougar and Buffalo vehicles and when we and IST will produce Wolfhoundvehicles, and the date as of which we will achieve any particular monthlyproduction 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 a wheeled vehicle approach that balances three potentially competingoperational or mission dynamics: (i) protection, which refers to the levelof crew survivability against blast- and ballistic- attack; (ii) payload,which refers to the load that the vehicles can carry on board the platform,measured in units, such as crew members and cargo; and (iii) performance,which refers to a vehicle’s automotive mobility, its ability to providetechnological solutions to mission requirements, and its suitability fortransportation in existing 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.*

* *

IntegratedSurvivability Technologies Limited, an England and Wales company (“IST”), is ajoint venture between Force Protection Advanced Solutions Limited (“FPAS”), asubsidiary of Force Protection Industries, Inc., and NP Aerospace Limited,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.  The vehicles delivered by IST will be basedon the version of our Wolfhound, Buffalo, Mastiff and Ridgbackvehicles.   Force Protection and NPAerospace Limited each own a 50% interest in IST and the board of IST consistsof six members, three of whom are appointed by Force Protection.  Pursuant to the joint venture, IST willcontract with Force Protection Industries, Inc., a subsidiary of ForceProtection, Inc., for the delivery of the vehicles to IST.  As of March 31, 2009, we havecontributed $2.1 million for this investment in IST.  Our current contract with IST calls for anadditional capital contribution on July 6, 2009.  However, we do not anticipate that anadditional contribution will be required at such time.  We account for this joint venture as anequity-method investment.

 

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Force Dynamics, ajoint venture between Force Protection, Inc. and General Dynamics LandSystems (“GDLS”), distributes blast- and ballistic-protected vehicles. ForceDynamics currently offers the Cheetah M-ATV, a highly versatile Cheetah vehicledesigned for use in challenging terrain environments.  Force Protection and GDLS each own a 50%interest in Force Dynamics and the board of Force Dynamics consists of six members,three of whom are appointed by Force Protection.  All future contracts awarded to ForceDynamics, pursuant to the M-ATV contract, will be wholly subcontracted to eachof Force Protection and GDLS pursuant to a 50/50 work share allocation at therevenue level.  We account for this joint venture as an equity-methodinvestment.  In March 2009, ForceDynamics received its first award and on April 30, 2009, Force Dynamicsreceived an ID/IQ award for a minimum of three M-ATV Cheetah vehicles.

 

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. We intend to use this facility fortraining and sustainment purposes beginning in late May. In October 2008,we leased an office in the Washington DC vicinity. In November 2008, weleased office space in Sterling Heights, Michigan, for use as an offsiteengineering office. In January 2009, we leased office and warehouse spacein North Charleston, SC.

 

References herein to“Force Protection,” the “Company,” “we,” “our,” or “us” refer to ForceProtection, Inc. and its subsidiaries unless otherwise stated or indicatedby 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 salesto foreign governments. We continually align our workforce to satisfy ourbusiness requirements.

 

*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 tocapture contract awards for our products and services in a volatilemarketplace;

 

·               Expanding ouroperations internationally;

 

·               Competing for lifecycle logistics support for our fielded fleet of vehicles;

 

·               Establishinglong-term programs to include upgrades, remanufacture, and sustainment for ourfleet of vehicles;

 

·               Continuing theexpansion of our customer base both domestically and internationally;

 

·               Continuing thedevelopment of new products to bring to market;

 

·               Establishing andmaintaining our joint ventures and teaming arrangements; and

 

·               Eliminating orreducing internal control weaknesses over financial reporting and disclosure.

 

The main uncertaintyabout our future operations is whether we will continue to receive additionalorders or 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 thirdquarter of 2009 and for our Buffalo vehicles to extend production until thefourth quarter of 2009. It is impossible to predict with certainty whether suchfuture orders or contracts will be placed by existing or new customers. If wedo 

 

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not receive future ordersor contracts for production beyond such dates, it is unlikely that our vehiclebusiness will continue and our business will be materially 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. We received and fulfilled a large number of vehicleorders from the United States military under the MRAP program, which accountedfor substantially all of the increase in our net sales during the year ended December 31,2008. These orders have resulted, in significant part, from the particularcombat situations encountered by the U.S. military in Iraq and Afghanistan,especially the use of IEDs and EFPs by enemy combatants. We cannot be certain,therefore, to what degree the United States military will continue placingorders, and these orders may decrease significantly or cease. The loss orsignificant reduction in government funding of a large program in which weparticipate could also result in a material decrease to our future sales, earningsand cash flows.

 

We have identifiedmaterial weaknesses in our internal control over financial reporting and haveconcluded that our disclosure controls were not effective as of March 31,2009.  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 financial statementsthat will require amendments and restatements to those financial statements,which could have a material adverse effect on us and the price of our commonstock.

 

During 2008 and the firstquarter of 2009, we sought to stabilize our business to match our contractdelivery order requirements. We recognized that our business was changing, andin response, 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 costsassociated with our rapid expansion based on the expectation of future contractrevenues. We are still experiencing and may continue to experience certaineffects from this rapid growth, such as payments under severance arrangementsand the costs associated with excess manufacturing capacity and inventory. Thishas placed significant demands on our management and our administrative,operating, manufacturing and financial resources. In addition, our accountingand financial systems need to be substantially improved in order to accommodateour current and projected production levels and to support our governmentcompliance requirements now that we are classified as a large business underapplicable federal contracting regulations. We continue to face challenges inimproving our administrative, operating, managerial, accounting and financialsystems to accommodate our current 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:

 

·     Identifynew products and markets to meet evolving customer requirements;

 

·     Capitalizeon demand for blast- and ballistic-protected vehicles and other survivabilitysolutions;

 

·     Expandour total life cycle support footprint;

 

·     Focuson core competencies;

 

·     Leveragekey relationships to grow our business; and

 

·     Developand expand strategic partnerships.

 

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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 forcesusing our vehicles in Iraq will reduce the operational tempo placed on ourfleet;

 

·                     An increase in forces deploying toAfghanistan will necessitate changes to the vehicles and increasedsustainment/maintenance requirements;

 

·                     Declining defense budgets may havean impact 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-month periodsended March 31, 2009 and 2008 as prepared in accordance with generallyaccepted accounting principles in the United States of America (“GAAP”).

 

***Comparison of Results of Operations for the Three MonthsEnded March 31, 2009 and 2008***

*** ***

The following tablepresents our results of operations for the three-month periods ended March 31,2009 and 2008 as well as the percentage change from year to year.

 
| ** **                           | ** ** | **For the three months ended March 31,** | ** ** | **Percentage** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|
| **(in thousands)**                   | ** ** | **2009**                                      | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Net sales                            |       | $                                             | 184,734    |           | $          | 403,047 |   | -54 | % |
| Cost of sales                        |       | 147,832                                       |       | 364,716        |       | -59 | % |
| Gross profit                         |       | 36,902                                        |       | 38,331         |       | -4 | % |
| General and  administrative expenses |       | 20,851                                        |       | 24,625         |       | -15 | % |
| Research and  development expenses   |       | 4,605                                         |       | 2,860          |       | 61 | % |
| Operating income                     |       | 11,446                                        |       | 10,846         |       | 6 | % |
| Other income  (expense), net         |       | (62                                           | )          | 511            |       | -112 | % |
| Interest expense                     |       | (136                                          | )          | (125           | )          | 9 | % |
| Income before  income tax expense    |       | 11,248                                        |       | 11,232         |       | n/m |   |
| Income tax  expense                  |       | (3,872                                        | )          | (4,195         | )          | -8 | % |
| Net income                           |       | $                                             | 7,376      |           | $          | 7,037 |   | 5 | % |

 

----

n/m—not meaningful

* *

*Unitssold*

* *

The following tablepresents our vehicle shipments for the three-month periods ended March 31,2009 and 2008 as well as the percentage change from year to year.

 
| ** **             | ** ** | **For the three months ended March 31,** | ** ** | **Percentage** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|----------------|------------|
| **(units sold)**       | ** ** | **2009**                                      | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Buffalo                |       | 12                                            |       | 24             |       | -50 | % |
| Cougar (all  variants) |       | 122                                           |       | 755            | *          | -84 | % |
| Cheetah                |       | 2                                             |       | —         |       | n/m |   |
| Total units sold       |       | 136                                           |       | 779            |       | -83 | % |

 

----

n/m—not meaningful

 

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* Includes 421 vehiclesproduced by GDLS for the three months ended March 31, 2008. This balanceexcludes the Iraqi Light Armored Vehicles (“ILAV”) for which we act as asubcontractor to primarily provide labor only for a portion of the productionof the vehicles. As a result, we have reduced the previously reported unitssold for Cougar (all variants) and total units sold by 22 for the three monthsended March 31, 2008.

 

The decrease in vehiclessold for the three-month comparative periods is primarily due to vehiclescompleted pursuant to the sole source and competitive contracts awarded to usunder the MRAP program.  Additionally, weexperienced delays in the initial production of the Buffalo A2 route-clearancevehicle. As a result, the amount of units we could produce decreased during thefirst quarter of 2009.

 

*Netsales*

* *

The decrease in net salesfrom the comparative periods is attributable to a decrease in volume of vehicledeliveries, partially offset by an increase in sales of spare parts andlogistics services, which includes field service representatives, training,ILAV subcontractor revenues and technical publications. The mix of vehiclesdelivered and spare parts and logistics sales and the percentage change in thecomparative periods are set forth in the following table:

 
| ** **                 | ** ** | **For the three months ended March 31,** | ** **    | **Percentage** | ** ** |
|----------------------------|------------|-----------------------------------------------|---------------|----------------|------------|
| **(in thousands)**         | ** ** | **2009**                                      | ** **    | **2008**       | ** ** | **Change** | ** ** |
| Buffalo                    |       | $                                             | 10,800        |           | $          | 16,692 |   | -35 | % |
| Cougar (all  variants)     |       | 55,622                                        | *             | 357,674        | *          | -84 | % |
| Cheetah                    |       | 1,000                                         |          | —         |       | n/m |   |
| Spare parts and  logistics |       | 117,312                                       |          | 28,681         |       | 309 | % |
|                       |       | $                                             |  184,734 |           | $          | 403,047 |   | -54 | % |

 

----

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 $0.4 million andreclassified $5.6 million from Cougar (all variants) to spare parts andlogistics revenue for the three months ended March 31, 2009 and March 31,2008, respectively.

 

*Cost ofsales and Gross profit*

* *
| ** **                            | ** ** | **For the three months ended March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                    | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Cost of sales                         |       | $                                             | 147,832    |   | $ | 364,716 |   |
| Gross profit                          |       | $                                             | 36,902     |   | $ | 38,331 |   |
| Gross profit  percentage of net sales |       | 20.0                                          | %          | 9.5 | % |

 

 

**The grossprofit percentage increased by 10.5 percentage points for the three monthsended March 31, 2009, over the comparable 2008 period. The increase wasprimarily due to the absence of GDLS Subcontract activity in 2009.  During the three months ended March 31,2008, we recognized** no gross profit on $196.4 million ofvehicles sold that were produced by GDLS. There were no vehicles produced byGDLS under the GDLS Subcontract during the first quarter of 2009.   The gross profit percentage also increaseddue to higher profit margin sales of spare parts and logistic services and alower write-down of our raw material and supplies to their net realizablevalues from $2.8 million during the three months ended March 31, 2008to $0.2 million for the three months ended March 31, 2009.

 

*Generaland administrative expenses*

* *
| ** **                           | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| General and  administrative expenses |       | $                                             | 20,851     |   | $ | 24,625 |   |
| As a percentage  of net sales        |       | 11.3                                          | %          | 6.1 | % |
|                                      |            |                                               |            |  |  |  |  |

 

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General andadministrative expenses decreased $3.8 million for the three months ended March 31,2009 from the comparable 2008 period due to the $4.9 million impairment chargefor certain Roxboro, North Carolina assets and the $1.5 million one-timecontribution to the Medical University of South Carolina Foundation for braintrauma research, which both occurred in the first quarter of 2008. Thesedecreases were partially offset by $3.2 million of 2006 re-audit costs incurredin the first quarter of 2009.

 

*Researchand development expenses*

* *
| ** **                         | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Research and  development expenses |       | $                                             | 4,605      |   | $ | 2,860 |   |
| As a percentage  of net sales      |       | 2.5                                           | %          | 0.7 | % |
|                                    |            |                                               |            |  |  |  |  |

 

Research and developmentexpenses increased as a percentage of net sales by 1.8 percentage points in thethree months ended March 31, 2009 over the comparable 2008 period. Theincrease is primarily due to higher research and development expenses on asignificant decrease in sales volume. Total research and development expenses increased over the comparativeperiod primarily due to an increased level of expenditures on the M-ATVprototypes during the first quarter of 2009.

 

*Otherincome (expense), net*

* *

Other income decreased inthe three months ended March 31, 2009, as compared to the 2008 period, dueto lower interest income as a result of decreased interest rates coupled with a$0.2 million loss on our joint venture with IST.  SeeNote 1, *Organization and Description of theBusiness*, in the accompanying unaudited condensed consolidatedfinancial statements.

 

*Interestexpense*

* *

Interest expense wasrelatively flat for the three months ended March 31, 2009, as compared tothe 2008 period.  A line of credit feewas charged in the first quarter of 2009, which was comparable to the loanrenewal fees charged in the first quarter of 2008.

 

*Incometax expense*

* *

The effective income taxexpense rate for the three months ended March 31, 2009 was approximately34% compared to the effective income tax rate of approximately 37% for thecomparable 2008 period.  See Note 6,*Income Taxes*, in the accompanying unaudited condensed consolidatedfinancial statements.

 

*Netincome*

* *
| ** **                           | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands, except per share)** | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Net income                           |       | $                                             | 7,376      |   | $ | 7,037 |   |
| Diluted earnings  per share          |       | $                                             | 0.11       |   | $ | 0.10 |   |

 

Net income for the threemonths ended March 31, 2009 increased over the comparable 2008 periodprimarily due to a higher gross profit percentage as a result of a change inmix of revenue (including no vehicle revenues from the GDLS Subcontract), loweroperating expenses and a lower income tax expense.

 

*Backlog*

* *

The following table setsforth the number of vehicles included in our backlog as of March 31, 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 agency. We cannot assure you that we will deliver or sell all of thevehicles 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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| ** **                   | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Buffalo                      |       | 68                                            |       | 42 |   |
| Cougar MRAP  (Competitive)*  |       | 4                                             |       | 962 |   |
| Cougar Mastiff               |       | 8                                             |       | 174 |   |
| Cougar (all  other variants) |       | 10                                            |       | 8 | ** |
| Total                        |       | 90                                            |       | 1,186 |   |

 

----

 * Refers to Cougar vehicles manufactured under the GDLS Subcontractpursuant to which we and GDLS fulfill the MRAP Competitive Contract.

 

** Excludes the ILAV forwhich we act as a subcontractor to primarily provide labor only for a portionof these vehicles. As a result, we have reduced the previously reported unitssold for Cougar (all variants) and total units sold by 5 for the three monthsended March 31, 2008.

 

On April 1,2009, IST, our joint venture with NP Aerospace Limited, was awarded a contractby the United Kingdom Ministry of Defence for 97 Wolfhound Heavy tacticalsupport vehicles, a 6-wheeled Cougar variant vehicle.  The contract has anapproximate value of $122.6 million.  Upon this award, on April 1,2009, IST entered into a subcontract with Force Protection Industries for thedelivery of 97 Wolfhound vehicles.  This subcontract has an approximatevalue of $65.7 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 months ended March 31, 2009 and 2008:

 
| ** **                                        | ** ** | **For the three months ended March 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Net cash  provided by operating activities        |       | $                                             | 14,153     |   | $ | 3,129 |   |
| Net cash used in  investing activities            |       | (5,211                                        | )          | (6,181 | ) |
| Net cash used in  financing activities            |       | (113                                          | )          | (167 | ) |
| Increase  (decrease) in cash and cash equivalents |       | $                                             | 8,829      |   | $ | (3,219 | ) |

 

As of March 31,2009, we had $119.8 million of cash and cash equivalents, an increase from$111.0 million as of December 31, 2008, and an increase from $87.8 millionat March 31, 2008.

 

*CashFlows from Operating Activities*

* *

Cash provided by operating activities increased by$11.0 million during the first three months of 2009 compared with the firstthree months of 2008.  This change wasprimarily due to a decrease in working capital, including the followingsignificant changes in working capital for the first three months of 2009:

 

Working capital assets:

 

(1)          an increase in accountsreceivable of $13.9 million resulting primarily from the timing of sales (ahigher portion of first quarter 2009 shipments were made near the end of theperiod in comparison to the fourth quarter of 2008);

 

(2)          a net increase ininventories of $12.0 million resulting primarily from the purchase of rawmaterials and supplies to support production requirements for new contracts,including Buffalo A2 vehicles, ForceArmorTM kits and Wolfhound tactical supportvehicles; and

 

(3)          an increase in prepaidincome taxes of $10.3 million resulting from a federal income tax payment madeduring the first quarter of 2009.

 

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Working capitalliabilities:

 

(1)          an increase in accountspayable of $8.3 million primarily resulting from the timing of purchases andrelated payments; [an increase in advance payments on contracts of $14.2million primarily resulting from customer advances received on a contract forForceArmorTM kits;

 

(2)          an increase in theamount due to the United States government of $19.4 million, primarily due toincreased definitization reserve requirements for vehicles sold under FMScontracts and MRAP-related spare parts sales; and

 

(3)   an increase in advance payments on contractsof $14.2 million primarily resulting from customer advances received on acontract for Force ArmorTM kits.

 

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 March 31,2009 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 decreased by $1.0 million during the first three months of 2009compared with the first three months of 2008 due to reduced capitalexpenditures, partially offset by a $2.1 million investment in IST, our jointventure with NP Aerospace, as of March 31, 2009.  See Note 1, *Organizationand Description of the Business*, in the accompanying unauditedcondensed consolidated financial statements.

 

*CashFlows from Financing Activities*

* *

Cashprovided by financing activities was relatively flat during the first threemonths of 2009 compared with the first three months of 2008 due to minimalstock option exercises and a minimal change in long-term liabilities.

 

*CurrentLiquidity and Capital Resources*

* *

Our cash and cashequivalents as of March 31, 2009 were held for working capital purposesand were invested primarily in short-term United States Treasury bills andmoney market funds. We do not enter into investments for trading or speculativepurposes.

 

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 in2009.

 

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 besufficient to meet our presently budgeted capital expenditures and our otherpresently anticipated cash needs for the year ending December 31, 2009. Inaddition, we have available to us a $40 million line of credit, whichexpires on April 30, 2010. After that time, we expect that we may need toobtain additional sources of capital, which may include borrowings or theissuance of debt or equity securities, including common stock, and there can beno assurance that such financing will be available to us when we need it or, ifavailable, that the terms of any such financing will be satisfactory to us andnot dilutive to our shareholders. Any failure to obtain necessary capital asand when required could have a material adverse effect on our business,prospects, financial position, results of operations and cash flows.

 

**Off-BalanceSheet Arrangements**

** **

In accordance with thedefinition under SEC rules and regulations, the following qualify as off–balancesheet arrangements:

 

·                     anyobligation under certain guarantees or contracts;

 

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·                     a retained orcontingent interest in assets transferred to an unconsolidated entity orsimilar entity or similar arrangement that serves as credit, liquidity, ormarket risk support to that entity for such assets;

 

·                     anyobligation under certain derivative instruments; and

 

·                     anyobligation under a material variable interest held by the registrant in anunconsolidated entity that provides financing, liquidity, market risk, orcredit risk support to the registrant, or engages in leasing, hedging, orresearch and development services with the registrant.

 

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

 

As of March 31,2009, we did not have any obligation under certain guarantees or contracts asdefined above.

 

As of March 31,2009, we did not have any retained or contingent interest in assets as definedabove.

 

As of March 31,2009, we did not hold derivative financial instruments, as defined by FASBStatement No. 133,*Accounting forDerivative Instruments and Hedging Activities,* 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 March 31,2009 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 three months endedMarch 31, 2009, there were no significant changes to these obligations asreported in our Annual Report on Form 10-K for the year ended December 31,2008, except that our purchase obligations decreased to $91.0 million as of March 31,2009, from $117.5 million as of December 31, 2008.

 

**CriticalAccounting Policies and Estimates**

** **

For the quarterly periodended March 31, 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 March 31, 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.

 

**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 State 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 

 

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our financing needschange in the future, interest rate risk may become a more significant issuefor 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 United States Securities Exchange Act of 1934, asamended (“Exchange Act”), is recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the Securitiesand Exchange Commission (“SEC”) and accumulated and communicated to management,including the chief executive officer and chief financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

In connection with thepreparation of this Quarterly Report on Form 10-Q for the period ended March 31,2009, 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 March 31, 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 March 31, 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 unaudited condensedconsolidated financial statements included in this report present fairly, inall material respects, Force Protection’s financial position and results ofoperations and cash flows for the periods presented in conformity with UnitedStates 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 March 31, 2009 as a result ofthe material weaknesses:

 

*Accountingfor revenue recognition*—We did not maintain effectivecontrols over the completeness and accuracy of revenue, accounts receivable andrelated reserves. Specifically, effective controls were not designed and inplace to ensure that sales orders were complete, accurate and recorded on atimely basis. Further, reconciliations were not completed in a timely manner toensure the accuracy of revenue recognition.

 

*Inadequatemonitoring of non-routine and non-systematic transactions* —Wedid not have effective controls in place to monitor and accurately recordnon-routine and non-systematic transactions. During the fourth quarter of 2008,we implemented additional processes for reviewing and monitoring non-routinebusiness activities within our financial statement close process. Theseprocesses have not been in place for an adequate period of time for us to determinewhether the material weakness 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**

** **

Aspreviously disclosed under “Item 9A—Controls and Procedures” in our AnnualReports on Form 10-K for the fiscal year ended December 31, 2008, weconcluded that our internal control over financial reporting was not effectivebased on the material weaknesses identified. During the first quarter of 2009, we continued our ongoing effort toremediate the two material weaknesses that existed as of December 31,2008.

 

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Although there were nosignificant changes in our internal control over financial reporting during theperiod covered by this report, we have engaged in, and are continuing to engagein, substantial efforts to improve our internal control over financialreporting and disclosure controls and procedures related to our financialstatements and disclosures. These efforts include the following: strengtheningthe processes and controls over sales order maintenance and invoicing,timeliness of reconciliations, and monitoring of revenue, accounts receivable,and related reserves. This is accomplished with the addition of professionalstaff with the skills and experience needed for a public company of our sizeand 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**

** **

*ShareholderDerivative Complaints*

* *

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.  Motionsto consolidate the three shareholder derivative actions filed in Charleston,South Carolina Circuit Court are currently pending before the Court.

 

*CertainOther Disputes*

* *

On November 13,2007, the Company was served with a lawsuit filed by a former senior employeeagainst Force Protection Inc., Force Protection Industries, Inc. andformer Force Protection officers. The complaint, filed in the Charleston (SouthCarolina) County Court of Common Pleas, alleged, among other things, that theformer employee was owed warrants of approximately 83,000 shares of our commonstock and certain back wages and set forth claims for, *inter alia*, breach of contract, violationof the South Carolina Payment of Wages Act, retaliatory wrongful discharge, anddefamation. We answered the complaint on January 25, 2008. On March 13,2009, we entered into a confidential settlement of this matter and the lawsuithas been dismissed with prejudice.

 

On August 15, 2008,we received a $1.1 million notice of claim of lien for the balance oftooling supplied by a vendor to our prime contractor on the Roxboro, NorthCarolina Facility. We have demanded that the prime contractor resolve thismatter with its vendor and indemnify us for this claim of lien.  On March 31, 2009, we settled thismatter for $120,000.

 

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.

 

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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, you shouldcarefully consider the risk factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2008 filed with the SEC on March 26, 2009, which could materially affectour business, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing Force Protection.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition, operating results or cash flows.

 

***Our limited control over our joint ventures may delay orprevent us from implementing our business strategy which may adversely affectour financial results.***

*** ***

We are currently a partyto joint venture arrangements with NP Aerospace and GDLS for the award andproduction of our vehicles.  We may alsoenter into additional joint ventures in the future, and some of our jointventure partners may also be our competitors. Pursuant to the terms of IST, our joint venture with NP Aerospace, andForce Dynamics, LLC, our joint venture with GDLS, we share control oversignificant decisions with our joint venture partners.  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 ventures and may not be able to exercise control overany future joint venture, we may not be able to require our joint ventures totake actions 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 our projectagreements and joint venture agreements, we may be jointly and severable liableto the customer for the performance of the entire contract and anynon-performance by our subcontractors or partners in the project is ourresponsibility. If our project partner or subcontractor in such arrangementfails to fulfill its obligations, we could have to carry the resultantliability toward the customer and would have to rely on our ability to obtainreimbursement from our project partner or subcontractor for our costs, over andabove the reimbursement from the customer. Obtaining such reimbursement couldrequire us to engage in litigation and could take a substantial amount of time.If our partner or subcontractor became insolvent or ceased operations, we mightnot be able to obtain reimbursement.  Wealso face risks through our equity method investments in companies that we donot control.

 

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

** **

None.

 

**Item3. Defaults Upon Senior Securities**

** **

None.

 

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

** **

None.

 

**Item5. Other Information**

** **

None.

 

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** **

**Item6. Exhibits**

** **

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

 

**EXHIBITINDEX**

** **

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 been madesolely for the benefit of the other parties to the applicable agreement and:

 

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

 

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

 

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

 

· Were made only as of 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. †                                                                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                         |
| 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 the Restated Articles of Incorporation. †                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                         |
| 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  Designation for Series D Convertible Preferred Stock, dated  January 19, 2005, filed as Exhibit 4.1 to the Company’s Current  Report on Form 8-K filed January 27, 2005, is hereby incorporated  by reference. |
|       |       |                                                                                                                                                                                                                                                         |
| 4.2        |       | Amended and  Restated Certificate of Designation for Series B Convertible Preferred  Stock, filed as Exhibit 4.1 to the Company’s Current Report on  Form 8-K filed February 15, 2005, is hereby incorporated by  reference.        |
|       |       |                                                                                                                                                                                                                                                         |
| 4.3        |       | Amended and  Restated Certificate of Designation for Series C Convertible Preferred  Stock, filed as Exhibit 4.2 to the Company’s Current Report on  Form 8-K filed February 15, 2005, is hereby incorporated by reference.         |

 

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| 10.1   |   | Teaming Agreement,  dated as of March 23, 2009, between Force Protection  Industries, Inc. and Spartan Motors Chassis, Inc. †                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                             |
| 10.2   |   | Contract with United  Kingdom Ministry of Defence, dated April 1, 2009. † *                                                                                                            |
|   |   |                                                                                                                                                                                             |
| 10.3   |   | Joint Venture  Agreement, dated as of March 31, 2009, among Integrated Survivability  Technologies Limited, Force Protection Advanced Solutions Limited and NP  Aerospace Limited. † * |
|   |   |                                                                                                                                                                                             |
| 10.4   |   | Subcontract, dated  April 1, 2009, among Force Protection Industries, Inc. and  Integrated Survivability Technologies Limited. † *                                                |
|   |   |                                                                                                                                                                                             |
| 31.1   |   | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. †                                                                            |
|   |   |                                                                                                                                                                                             |
| 31.2   |   | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. †                                                                            |
|   |   |                                                                                                                                                                                             |
| 32.1   |   | Certification of  Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. †                                           |

 

----

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

 

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

 

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**SIGNATURES**

** **

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

 

| * *                      | * *   | **FORCE  PROTECTION, INC.** |
|-------------------------------|------------|-----------------------------|
| ** **                    | ** ** | *(Registrant)*              |
| ** **                    | ** ** | * *                    |
|                          |       |                        |
| Date: May 11,  2009 |       | By:                         | /s/ MICHAEL MOODY |
| ** **                    | ** ** | ** **                  | **Name:** | **Michael  Moody** |
| ** **                    | ** ** | ** **                  | **Title:** | **President  and Chief Executive Officer** |
| ** **                    | ** ** | ** **                  | ** ** | **(principal  executive officer)** |
|                          |       |                        |
|                          |       |                        |
| Date: May 11, 2009       |       | By:                         | /s/ CHARLES MATHIS |
| ** **                    | ** ** | ** **                  | **Name:** | **Charles  Mathis** |
| ** **                    | ** ** | ** **                  | **Title:** | **Chief  Financial Officer** |
| ** **                    | ** ** | ** **                  | ** ** | **(principal  financial and accounting officer)** |

 

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