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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

OR

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

For the transition period from                            to                         

Commission File Number 001-33253

FORCE PROTECTION, INC.

(Exact Name of Registrant as Specified in Its Charter)

(843) 574-7001

(Registrant’s Telephone Number, Including Area Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-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.

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

The registrant had 64,986,234 shares of common stock outstanding as of October 21, 2011.

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PART I. FINANCIAL STATEMENTS

Item 1.    Financial Statements

Force Protection, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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Force Protection, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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Force Protection, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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1.     Summary of Significant Accounting Policies

Organization and Description of the Business

Force Protection, Inc. provides survivability solutions to support the armed forces of the United States (U.S.) and its allies.  We design, manufacture, test, deliver and support our blast- and ballistic-protected products to increase survivability for the users of our products.  Currently, we have one segment of operations, our survivability solutions.  We believe our specialty vehicles, including the Buffalo, Cougar and Ocelot, are at the forefront of blast- and ballistic-protected technology.  These vehicles are designed for reconnaissance and other operations and to protect their occupants from landmines, hostile fire and improvised explosive devices (commonly referred to as roadside bombs).  We are a key provider of the U.S. military’s Mine Resistant Ambush Protected vehicle program and have sold and delivered over 3,000 vehicles under this program.  We also provide our Cougar and Buffalo mine-protected vehicles to several foreign customers, including the United Kingdom Ministry of Defence (U.K. MoD) which has purchased three variants of our Cougar vehicle as well as a U.K.-specific variant of the Buffalo.  The U.K. MoD is also under contract to purchase 200 Foxhounds, an Ocelot variant, with deliveries scheduled to begin in the fourth quarter of 2011.  Complementing these efforts, we are developing and marketing a new vehicle platform, the Joint All-Terrain Modular Mobility Asset (JAMMA), which provides increased modularity, transportability, speed and mobility.  Across all vehicle programs we have sold approximately 4,700 vehicles since 2005.  Supporting our vehicle design, development and production initiatives, we develop, manufacture, test, deliver and support products and services aimed at further enhancing the survivability of our users against additional threats.  In addition, we provide long-term life cycle support services for our vehicles that involve development of technical data packages, supply of spares, field and depot maintenance activities, assignment of skilled field service representatives, and related training programs.  Our services are based on establishing and maintaining long-term relationships with the U.S. government and foreign military users.

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

In 2009, we formed Integrated Survivability Technologies Limited, an England and Wales company, referred to as IST, a joint venture between Force Protection Europe Limited, a subsidiary 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 acts as the prime contractor for vehicles and related total life cycle support awarded by the U.K. MoD to ensure that this customer has a single point of contact for its Wolfhound, Mastiff and Ridgback vehicles.  We account for this joint venture as an equity-method investment.  In September 2009, we formed Force Protection Australasia Pty Ltd, an Australian company, to pursue market opportunities in Australia and Asia.  Force Protection Australasia Pty Ltd is a wholly-owned subsidiary of Force Protection Europe Limited.  In January 2011, we formed Force Protection Survivability Solutions Canada, Inc., a Canadian company, to pursue market opportunities in Canada.  Force Protection Survivability Solutions Canada, Inc. is a wholly-owned subsidiary of Force Protection Industries, Inc.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the United States Securities and Exchange Commission (SEC) on March 9, 2011.  These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made herein are adequate to make the information not misleading.

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

These unaudited condensed consolidated financial statements include the assets, liabilities, revenues and expenses of our wholly-owned subsidiaries, Force Protection Industries, Inc. and Force Protection Technologies, Inc.  We eliminate from our financial results all significant intercompany accounts and transactions.

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

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-13 (ASU 2009-13), an update to Accounting Standards Codification (ASC) Topic 605 “Revenue Recognition,” which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit.  ASU 2009-13 is effective prospectively for revenue recognition arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  We adopted this guidance on January 1, 2011.  This guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which updates the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” related to disclosures about fair value measurements.  New disclosures will require entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers; and to present separately in the reconciliation for fair value measurements in Level 3 information about purchases, sales, issuances and settlements on a gross basis rather than as one net amount.  This ASU  also amends ASC Subtopic 820-10 to clarify certain existing disclosures regarding the level of disaggregation at which fair value measurements are provided for each class of assets and liabilities; and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements, which became effective for fiscal years beginning after December 15, 2010.  We implemented ASU 2010-06 as of January 1, 2011.  The adoption of this guidance did not have, and is not expected to have, a material impact on our consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which updated the guidance in ASC Topic 820, “Fair Value Measurement.”  ASU 2011-04 improves comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards (IFRS).  ASU 2011-04 clarifies the application of existing fair value measurement requirements including (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and (3) quantitative information required for fair value measurements categorized within Level 3.  ASU 2011-04 also provides guidance on measuring the fair value of financial instruments managed within a portfolio, and application of premiums and discounts in a fair value measurement.  In addition, ASU 2011-04 requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs.  The amendments in this guidance are to be applied prospectively, and are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted.  This guidance will become effective for us as of the beginning of our first quarter of 2012.  The adoption of this guidance is presentation and disclosure related and, therefore, will not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” which updated the guidance in ASC Topic 220, “Comprehensive Income.”  Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This new guidance was originally proposed to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and applied retrospectively.  In October 2011, the FASB proposed to defer the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income.  However, the remaining requirements of ASU 2011-05 are effective for us as of the beginning of our first quarter of 2012.  The adoption of this guidance is presentation and disclosure related and,

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therefore, will not have a material impact on our consolidated financial position, results of operations or cash flows.

We have determined that all other recently issued accounting guidance will not have a material impact on our consolidated financial position, results of operations or cash flows, or does not apply to our operations.

2.     Accounts Receivable

Accounts receivable consist of the following (in thousands):

As of September 30, 2011 and December 31, 2010, our accounts receivable included $41.6 million and $53.8 million, respectively, of earned and unbilled accounts receivable, of which $6.1 million and $1.9 million, respectively, is earned and unbilled to IST and $35.5 million and $51.9 million, respectively, is earned and unbilled to the U.S. government.  The earned and unbilled accounts receivable as of September 30, 2011 and December 31, 2010 are primarily due to a significant number of “not-to-exceed” undefinitized contracts whereby we cannot fully bill until the contracts are definitized although the products have been delivered, and accrued service revenues that are generally billed one month in arrears.

3.     Inventories

Inventories consist of the following (in thousands):

Work in process mostly consists of vehicles and subassemblies in process.  As of September 30, 2011 and December 31, 2010, our work in process included $37.4 million and $3.3 million, respectively, of Foxhound-related materials and capitalized labor and overhead costs of our European operation for the Light Protected Patrol Vehicle (LPPV) program, which is scheduled to begin deliveries in the fourth quarter of 2011.

As of December 31, 2010, finished goods mostly consisted of Mastiff vehicles in-transit to IST as well as completed Buffalo vehicles and modernization kits that were not accepted by the customer until the first quarter of 2011.

4.     Property and Equipment

Property and equipment consist of the following (in thousands):

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Asset Impairment Expense

During the second quarter of 2011, we determined that the carrying value of our Roxboro, North Carolina facility had been impaired based on our estimate of future cash flows to be generated from the facility.  As a result, we recorded a $3.2 million charge to operating expense for asset impairment to reflect the write-down of the Roxboro fixed assets to estimated fair value during the second quarter of 2011.  We are currently evaluating alternative uses for this facility.

5.     Income Taxes

We provide for income taxes using the liability method in accordance with FASB ASC Topic 740, “Income Taxes.”  In accordance with this guidance, the provision for taxes on income recognizes our estimate of the effective tax rate expected to be applicable for the full year, adjusted for the impact of any discrete events, which are reported in the period in which they occur.  Each quarter, we re-evaluate our estimated tax expense for the year and make adjustments for changes in the estimated tax rate.  Additionally, we evaluate the realizability of our deferred tax assets on a quarterly basis.  Our evaluation considers all positive and negative evidence and factors, such as the scheduled reversal of temporary differences, historical and projected future taxable income or losses, and prudent and feasible tax planning strategies.

The income tax (expense) benefit for the three and nine months ended September 30, 2011, respectively, is based on the estimated effective tax rates applicable for the fiscal year ending December 31, 2011, after considering items specifically related to the interim periods.  The income tax expense for the three and nine months ended September 30, 2010 was based on the estimated effective tax rates applicable for the fiscal year ended December 31, 2010, after considering items specifically related to the interim periods.

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

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A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:

The effective income tax rate is the provision for income tax as a percent of income (loss) before income taxes.  The effective rate differs from the expected federal statutory rate of 35% primarily due to the research and development credit, the domestic production activities deduction, state income taxes, interest expense related to uncertain tax benefits, and nondeductible items.

Tax years ended December 31, 2008 through December 31, 2010 remain open and are subject to examination by the Internal Revenue Service.  Tax years ended December 31, 2002 and December 31, 2007 also remain open to a limited extent due to carryovers from those years used in tax years 2008 and after.  We believe that we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our income taxes receivable and accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax laws applied to the facts of each matter.  However, we do have a $0.9 million reserve, which includes approximately $26,000 of interest, for prior years’ income taxes as a result of applying the guidance in FASB ASC Topic 740, “Income Taxes.”  If recognized, the entire $0.9 million would favorably impact the Company’s effective tax rate.  It is reasonably possible that certain unrecognized tax benefits as of September 30, 2011, could decrease by approximately $0.4 million during the subsequent twelve months due to the resolution of some or all of these matters by various taxing authorities or by the expiration of statutes of federal and state limitations.

6.     Earnings (Loss) Per Common Share

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

The calculation of basic earnings (loss) per common share is based on the weighted-average number of our common shares outstanding during the applicable period.  The calculation for diluted earnings (loss) per common share recognizes the effect of all dilutive potential common shares that were outstanding during the respective

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periods, unless their impact would be anti-dilutive.  We use the treasury stock method to calculate the dilutive effect of stock options and other common stock equivalents (potentially dilutive shares).  These potentially dilutive shares include stock options and stock grants.

We did not include stock options to purchase 197,002 shares of common stock in our computation of diluted loss per common share for the nine months ended September 30, 2011 as the effect of including such options would be anti-dilutive.  For the three and nine months ended September 30, 2010, we did not include stock options to purchase 75,582 and 65,169 shares of common stock, respectively, in our computation of diluted earnings per common share as the effect of including such options would be anti-dilutive.

In addition, we did not include 654,088 and 738,711 of unvested restricted stock grants in the computation of diluted loss per common share for the nine months ended September 30, 2011 and the three months ended September 30, 2010, respectively, since inclusion would be anti-dilutive in our computation of diluted loss per common share because we recorded a net loss in each of these periods.

7.              Comprehensive Income (Loss)

The following table shows the components of comprehensive income (loss):

8.      Derivative Instruments and Hedging Activities

We are exposed to foreign currency risks that arise from normal business operations, including payments to suppliers, receipts from customers and inter-company transactions denominated in foreign currencies.  The Company strives to control its exposure to these risks through its normal operating activities and, where appropriate, through derivative instruments.  We do not use any derivative financial instruments for trading or other speculative purposes.

All derivatives are recorded at fair value.  Prior to the second quarter of 2011, we had not used any derivative instruments to hedge our foreign currency exposure.  At September 30, 2011, we had forward foreign exchange contracts with maturities through February 2012 and a U.S. dollar equivalent notional value of $13.6 million outstanding, all of which were designated and accounted for as cash flow hedges.  As a cash flow hedge, the effective portion of a change in the fair value of the derivative is recognized as a component of Accumulated other comprehensive loss until the underlying hedged item is recognized in earnings, or the forecasted transaction is no longer probable of occurring.  If a derivative does not qualify as a highly effective hedge, any change in fair value is immediately recognized in earnings.  We formally document all hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions.

We classify the fair value of all derivative contracts as current or non-current assets or liabilities, depending on the gain or loss position of the hedged contract at the balance sheet date, and the timing of future cash flows.  As of September 30, 2011, we had derivative liabilities recorded in Other current liabilities of $0.3 million and no derivative assets.  For the three and nine months ended September 30, 2011, we had no gains or losses from hedges classified as not highly effective.  The amount of estimated realized and unrealized net losses from cash flow hedges recorded in Accumulated other comprehensive loss at September 30, 2011 was $0.2 million, net of income taxes, all of which is expected to be reclassified to earnings in the next twelve months.

9.     Fair Value of Financial Instruments

ASC Topic 825, “Financial Instruments,” requires disclosures of the fair value of financial instruments.  The valuation techniques required for fair value accounting are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions.  The two types of inputs create the following fair value hierarchy:

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·                  Level 1 - Quoted prices for identical instruments in active markets.

·                  Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

·                  Level 3 - Significant inputs to the valuation model are unobservable.

Our financial instruments include cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued liabilities and amounts due to United States government.  The carrying amounts of these financial instruments approximate their fair value because of the short-term maturity and highly liquid nature of these instruments.  Additionally, we have derivatives, which are measured using Level 2 inputs.  The carrying values of our financial instruments approximate their fair value as of September 30, 2011 and December 31, 2010.

10.     Commitments and Contingencies

Financing Commitments— Credit Facility

As of September 30, 2011 and December 31, 2010, we had a $40 million revolving line of credit with Wells Fargo Bank, National Association, which expires on April 30, 2012.  Furthermore, we can designate up to $5.0 million for letters of credit against the $40 million line of credit.  There were no borrowings outstanding under the facility as of September 30, 2011 or December 31, 2010.  On July 23, 2010, we obtained a letter of credit in the amount of $3.3 million Australian dollars for the performance of our obligations under a contract for the Protected Mobility Vehicle-Light program (Land 121).  This letter of credit has lowered the availability under our line of credit to approximately $36.8 million as of September 30, 2011.  Our total borrowing capacity under the line of credit is also limited to a multiple of the sum of our net income, interest expense, income taxes, depreciation and amortization (EBITDA) as calculated quarterly on a rolling four quarters basis.  This maximum leverage ratio limitation did not impact the amount of availability under our line of credit as of September 30, 2011.   Borrowings under the line of credit bear a floating interest rate per annum on any principal borrowings equal to the LIBOR rate plus a spread.  The bank’s obligation to make loans under the line of credit is subject to, among other things, our compliance with various covenants, including the aforementioned maximum leverage ratio.  As of September 30, 2011 and December 31, 2010, we were in compliance with all of our revolving line of credit covenants.

Legal Proceedings

Shareholder Class Action and Derivative Actions

On March 10, 2008, the first of ten related class action lawsuits was filed against us and certain of our former and current directors and officers in the U.S. District Court for the District of South Carolina, Charleston Division, on behalf of a purported class of investors who purchased or otherwise acquired our stock during the period between August 14, 2006 and February 29, 2008.  The complaints sought class certification, and the allegations include, but are not limited to, that the defendants violated the Securities Exchange Act of 1934 and made false or misleading public statements and/or omissions concerning our business, internal controls, and financial results.  The individual class action lawsuits were consolidated on June 10, 2008, under the caption In Re Force Protection, Inc. Securities Litigation, Action No. 2:08-cv-845-CWH (Securities Class Action).  The parties to the Securities Class Action filed a stipulation of settlement on September 27, 2010 calling for payment of $24 million to the settlement class.  Following a hearing on January 25, 2011, the Court issued an Order and Final Judgment approving the settlement on March 8, 2011.  The Order and Final Judgment was not appealed and hence is final.

Between March 27, 2008 and September 24, 2010, a series of related shareholder derivative actions were filed in both state and federal courts against certain of our former and current directors and officers alleging that the individual defendants breached fiduciary duties, abused control, engaged in gross mismanagement, wasted corporate assets, engaged in improper insider trading, and were unjustly enriched.  Recovery is sought for the benefit of the Company, which has been named a nominal defendant in each derivative action.  Four derivative actions pending in the U. S. District Court for the District of South Carolina, Charleston Division, were consolidated on March 31, 2009, under the caption In Re Force Protection, Inc. Derivative Litigation, Action No.2:08-cv-01907-CWH (Federal Derivative Action).  An agreement to settle the Federal Derivative Action (but not the state court proceedings) was preliminarily approved by the federal court on October 5, 2010.  This settlement provides that the Company will adopt certain corporate governance practices, receive a payment of $2.25 million from insurance, and pay plaintiffs’

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attorney’s fees and expenses in an amount not to exceed $2.3 million.  The federal court held hearings on December 13, 2010 and September 13, 2011 to determine whether it should grant final approval to the Federal Derivative Action settlement, but the court has not yet issued an order concerning final approval.  The state court actions pending in South Carolina were consolidated on May 18, 2009.  Those actions have been stayed pending a ruling from the federal court regarding final approval of the Federal Derivative Action settlement.  Another substantially identical derivative action was filed in the state court of Nevada in September 2010.  The Company and the individual defendants have filed motions to dismiss the Nevada state court complaint.  Those motions are pending.

Neither the Company nor any of its present and former directors and officers has admitted any wrongdoing or liability in connection with above-referenced settlements.  Additionally, each settlement provides that the parties have reached a mutually agreeable resolution of the case to avoid protracted and expensive litigation, including the outcome and risks associated with proceeding.  In connection with the shareholder class action and Federal Derivative Action settlements, we recorded an $8.5 million charge to General and administrative expenses in the third quarter of 2010.  As of December 31, 2010, we recorded a $24.0 million asset within Other current assets in the accompanying unaudited condensed consolidated balance sheet, reflecting the escrow account that related to the class action settlement, as well as a $24.0 million litigation reserve for the class action settlement, which was included in Other current liabilities.  Since all legal contingencies that could have affected the class action settlement were exhausted during the second quarter of 2011, this liability and related asset were removed from the accompanying unaudited condensed consolidated balance sheet as of June 30, 2011.  However, we have an asset account and a liability account based on management’s estimates and beliefs, to address certain litigation-related matters.

Other Disputes

A total of 84 complaints from current and former employees are currently pending with the U.S. Equal Employment Opportunity Commission (EEOC), alleging, among other things, race and/or gender discrimination.  A majority of the complaints have been pending since 2007.  In July 2011, the EEOC notified the Company that it believes there is evidence to support 78 of these charges and other allegations of discrimination, and has requested that the Company participate in conciliation.  The Company does not agree with the EEOC’s position and is currently engaging in the conciliation process.

On June 26, 2009, a temporary independent contractor whose services we terminated in 2007 filed a complaint against the Company in the U.S. District Court for the District of South Carolina, Charleston Division, as Civil Action No. 2:09cv1708-DCN-BM, which alleges a violation under the employee protection provisions of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1514A; a violation of the anti-retaliation provision of the False Claims Act, 31 U.S.C. §3730(h); and a state common-law whistleblower claim.  The former independent contractor alleges that we terminated his engagement in retaliation for his allegation of certain corporate governance, government contracting, accounting and other irregularities.  On June 27, 2011, the court granted the motion of Force Protection Industries, Inc. to dismiss the state common-law whistleblower claim, and that claim has now been dismissed.  On July 19, 2011, the court granted the motion of Force Protection Industries, Inc. to dismiss the individual defendants without prejudice.  On September 7, 2011 the parties entered into a settlement agreement and on September 8, 2011 the lawsuit was dismissed with prejudice.  This settlement did not have a material impact on our financial condition, results of operations or cash flows.

On October 25, 2011, a new lawsuit was filed, but not served, against the Company in the Court of Common Pleas of Edgefield, South Carolina by seventeen plaintiffs who own property adjoining or close to our Edgefield, South Carolina blast range alleging negligence, trespass, nuisance, and strict liability. The plaintiffs seek unspecified actual damages and punitive damages as may be determined by the jury, interest, costs and such further relief as the Court and jury may deem proper.  The nuisance cause of action alleges that the Company should be enjoined from any further testing that involves the use of explosives.  We are currently evaluating the lawsuit.

Although we intend to defend ourselves in connection with the foregoing legal proceedings and claims, there can be no assurance that we will ultimately prevail in any of these matters, and any settlement or adverse judgment may have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.  We are also a party to other litigation which we consider routine and incidental to our business.  We may be involved from time to time in other litigation that could have a material effect on our operations or finances.  Other than the litigation described above, we are not aware of any pending or threatened litigation against us that could have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

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11.     Subsequent Event

On November 7, 2011, Force Protection, Inc., a Nevada corporation (“Force Protection”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among General Dynamics Corporation, a Delaware corporation (NYSE: GD) (“Parent”) and its wholly owned subsidiary, Falcon Acquisition Corp., a Nevada corporation (“Purchaser”).

Pursuant to the Merger Agreement, Parent has agreed to cause Purchaser to commence, as promptly as practicable (and in any event on or before the close of business on November 18, 2011), a tender offer (the “Offer”) to acquire all of the shares of common stock, par value $0.001 per share, of Force Protection (the “Shares”) that are outstanding at a price of $5.52 per Share, net to the holder thereof in cash without interest (the “Offer Price”).  Subject to satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will merge with and into Force Protection, with Force Protection surviving as a wholly-owned subsidiary of Parent (the “Merger”).  At the effective time of the Merger (the “Effective Time”), each Share outstanding immediately prior to the Effective Time (except any dissenting shares, treasury shares and restricted shares issued under Force Protection incentive plans) will be converted into the right to receive an amount in cash equal to the Offer Price.

In the Merger Agreement, Force Protection has granted to Purchaser an option (the “Top-Up Option”) to purchase from Force Protection, at a price per share equal to the Offer Price, that number of Shares equal to the lowest number of Shares that, when added to the number of Shares held by Parent and Purchaser at the time of such exercise, would constitute one share more than 90% of all Shares (on a fully diluted basis).

The consummation of the transaction is conditioned on: (a) in the case of the Offer, there having been tendered (and not withdrawn) that number of Shares that when added to the number of Shares owned by Parent and its affiliates (i) would represent a majority of all Shares (on a fully diluted basis) and (ii) would represent, when added to the number of Shares authorized and available for issuance in connection with the Top-Up Option, one share more than 90% of the Shares (on a fully diluted basis), (b) if required, receipt of approval of the stockholders of Force Protection, (c) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, (d) the absence of a Material Adverse Effect (as defined in the Merger Agreement) relating to Force Protection, and (e) other customary conditions.  Upon consummation of the earlier of the Offer and the Merger, each stock option and restricted share award granted under Force Protection incentive plans and outstanding immediately prior thereto shall be cancelled and, subject to certain conditions, converted into the right to receive cash based on the Offer Price.

Until the termination of the Agreement or the Effective Time of the Merger, Force Protection has agreed to operate its business in the ordinary course, consistent with past practice in all material respects, and has agreed to certain interim operating covenants set forth in the Merger Agreement.  These include, among other things, restrictions on capital expenditures, investments and entering into any new financing arrangements.  Force Protection has also agreed to certain restrictions with respect to Force Protection’s ability to discuss other acquisition proposals with third parties.  The Merger Agreement also includes customary termination provisions for both Force Protection and Purchaser, and provides that, in connection with the termination of the Merger Agreement in specific circumstances, Force Protection may be required to pay Purchaser a termination fee of $10.0 million and up to $2.0 million in expenses.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide information that is supplemental to, and should be read together with, our unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q.  Information in this Item 2 is intended to assist the reader in obtaining an understanding of our unaudited condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that accounted for those changes, and any known trends or uncertainties that we are aware of that may have a material effect on our future performance.  It also addresses how certain accounting principles affect our unaudited condensed consolidated financial statements.  MD&A includes the following sections:

·                  Overview

·                  Outlook

·                  Results of Operations—an analysis of our consolidated results of operations for the three and nine months presented in our unaudited condensed consolidated financial statements

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

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

·                  Contractual Obligations—a summary of our aggregate contractual obligations

·                  Critical Accounting Policies and Estimates—a discussion of accounting policies that require significant judgments and estimates

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

·                  Statements regarding the growth of the U.S. and world market for blast- and ballistic-protected vehicles, products or services,

·                  Statements regarding the U.S. military’s plans or intentions, including the drawdown of operations in Iraq and Afghanistan,

·                  Statements regarding our business development plans and strategy, including our plans to expand our product lines, diversify our business mix, and expand our markets internationally,

·                  Statements with respect to our ability to obtain materials, our ability to improve cost efficiencies and possible future changes in the efficiencies in our operations,

·                  Statements regarding our vehicles, products and services that may be purchased by our customers, including the type of vehicles demanded and other customer demands and expected changes in

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demand,

·                  Statements regarding the benefits of our products, services and programs, including our vehicles’ capabilities and the use of our vehicles, products and services for other than military purposes,

·                  Statements regarding our investments in research and development activities for our vehicles, products and services,

·                  Statements regarding any changes in our cost of sales, our general and administrative expenses, our asset impairment expense, our operating results or our research and development expenses as a percentage of net sales,

·                  Statements regarding the revenues that may be derived from, and the quantities of vehicles, products and services that may be purchased or ordered pursuant to, existing or possible future contracts or orders by various customers, including statements regarding the estimated value of those orders and contracts and statements about our backlog,

·                  Statements regarding the benefits that may be realized from our joint ventures, teaming arrangements and any new ventures or business developed pursuant to them,

·                  Statements regarding our expectation to apply prepaid 2011 federal income taxes to our projected tax obligation during the fourth quarter of 2011,

·                  Statements regarding our expected cash flow, cash needs and expected capital expenditures,

·                  Statements regarding our share repurchase program,

·                  Statements regarding our derivative instruments and hedging activities,

·                  Statements regarding the effect of our income tax positions on our effective tax rate,

·                  Statements regarding our expectations with respect to the matters pending with the U.S. Equal Employment Opportunity Commission (EEOC), and

·                  Statements regarding final approval of the state and federal derivative actions.

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

Overview

Force Protection, Inc. provides survivability solutions to support the armed forces of the United States (U.S.) and its allies.  We design, manufacture, test, deliver and support our blast- and ballistic-protected products to increase survivability for the users of our products.  Currently, we have one segment of operations, our survivability solutions.  We believe our specialty vehicles, including the Buffalo, Cougar and Ocelot, are at the forefront of blast- and ballistic-protected technology.  These vehicles are designed for reconnaissance and other operations and to protect their occupants from landmines, hostile fire and improvised explosive devices (IEDs, commonly referred to as roadside bombs).  We are a key provider of the U.S. military’s Mine Resistant Ambush Protected (MRAP) vehicle program and have sold and delivered over 3,000 vehicles under this program.  We also provide our Cougar and Buffalo mine-protected vehicles to several foreign customers, including the United Kingdom Ministry of Defence (U.K. MoD) which has purchased three variants of our Cougar vehicle as well as a U.K.-specific variant of the Buffalo.  The U.K. MoD is also under contract to purchase 200 Foxhounds, an Ocelot variant, with deliveries scheduled to begin in the fourth quarter of 2011.  Complementing these efforts, we are developing and marketing a new vehicle platform, the Joint All-Terrain Modular Mobility Asset (JAMMA), which provides increased modularity, transportability, speed and mobility.  Across all vehicle programs we have sold approximately 4,700 vehicles since 2005.  Supporting our vehicle design, development and production initiatives, we develop, manufacture, test, deliver and support products and services aimed at further enhancing the survivability of our users against additional threats.  In addition, we provide long-term life cycle support services for our vehicles that involve development of technical data packages, supply of spares, field and depot maintenance activities, assignment of

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skilled field service representatives (FSRs), and related training programs.  Our services are based on establishing and maintaining long-term relationships with the U.S. government and foreign military users.

Our business is heavily influenced by the needs of the U.S. military for blast- and ballistic-protected wheeled vehicles.  The majority of our revenue comes from our U.S. government contracts, including Foreign Military Sales.  We attempt to align our workforce and facilities to satisfy our business requirements.

We are headquartered in Summerville, South Carolina and have leased manufacturing facilities in Ladson, South Carolina.  We have office and warehouse space in Sterling Heights, Michigan; Roxboro, North Carolina; Arlington, Virginia; Bristol, United Kingdom; Shoreham, United Kingdom; and Leamington Spa, United Kingdom.  We conduct our blast range, research and development activities and customer training requirements at properties located in Edgefield, South Carolina; Summerville, South Carolina; and Hanahan, South Carolina.  We also provide military operations support in Kuwait, Afghanistan and other locations worldwide.

Outlook

The overseas contingency operations, especially in Iraq and Afghanistan, has confirmed that IEDs, landmines, explosively formed projectiles and rocket-propelled grenades pose a significant threat to coalition military personnel and civilians.  These weapons have been used extensively by terrorists and insurgent groups in Iraq, Afghanistan and other areas.  While we believe the world-wide market for blast- and ballistic-protected vehicles and other survivability solutions will remain at high levels for at least the next several years, we expect the current economic downturn to have an impact on the level of purchases of blast- and ballistic solutions by certain militaries.

As it relates to the current military campaign in the Middle East, in 2009, U.S. forces began drawing down from Iraq and this continued throughout 2010.  On October 21, 2011, President Obama announced that all U.S. combat forces would be withdrawn from Iraq by the end of 2011.  In 2010, the surge of approximately 33,000 U.S. troops in Afghanistan began and continued into 2011, which required additional MRAPs to support operations.  In June 2011, it was announced that the U.S. expected to drawdown forces in Afghanistan to pre-surge levels by autumn of 2012.

U.S. and international militaries are determining long-term roles for MRAPs.  The future requirements for long-term life cycle logistics plans, as well as an important effort to return vehicles that come out of theater to optimal, pre-battle condition to ensure readiness for future conflicts (commonly referred to as “reset and recapitalization”) is still to be determined.  MRAPs can be placed into permanent military organizations for convoy security, route clearance, explosive ordnance disposal and casualty evacuation, or be placed into prepositioned storage roles for regional response, or be sold to foreign military customers.

Our fiscal 2011 outlook is based on the following market assumptions and expectations:

·                  A continued conflict in Afghanistan, which necessitates continued modernization of our vehicles and an ongoing requirement for our FSRs resourced to support the sustainment and maintenance of units in that theater,

·                  Our current customers are expected to develop modernization and sustainment plans for our fielded fleet of vehicles and we will have to compete for the spares and sustainment support business for our fielded fleet of vehicles,

·                  While our international business is growing, current customer budget constraints could impact the timing of future orders,

·                  Certain challenges with the expansion of our customers, vehicles, products and services.  We will continue to try to capture contract awards for our vehicles, products and services in an evolving and competitive marketplace,

·                  Establishing long-term programs to include upgrades, remanufacture, and sustainment for our fleet of vehicles, and then expanding this capability to sustain MRAP vehicles of other original equipment manufacturers,

·                  Investing in research and development in relation to new vehicles, products and services to bring to market, and

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·                  Rationalizing our cost structure to match our sales and backlog.

Strategic Outlook

Our business strategy is focused on increasing shareholder value by providing survivability solutions, vehicles, products and services that are responsive, innovative, high-quality and affordable.  We intend to maintain and expand our current business as a leading supplier of survivability solutions, including protected vehicles, total life cycle support and other services, to the U.S. Department of Defense, other U.S. government agencies, foreign governments, and domestic and international commercial customers.  Our strategy is focused on growing balanced diverse revenues and earnings through organic growth, cost containment, and selected business acquisitions, enabling us to grow the Company.  Specific components of the strategy include the following:

·                  Perform favorably on contracts,

·                  Capitalize on our current business and grow sales organically,

·                  Invest in research and development and related program-specific capture opportunities,

·                  Continuously improve our cost structure, and

·                  Diversify through selected acquisitions, joint ventures, and teaming agreements.

As discussed in Item 4, Controls and Procedures, of this Quarterly Report on Form 10-Q, we believe that effective disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) under the Exchange Act) are in place as of September 30, 2011.  We will continue to devote our resources, in an amount we believe to be appropriate, to maintain effective internal controls over our financial reporting and disclosures.

Results of Operations

The following discussion and analysis is based on our unaudited condensed consolidated statements of operations, which reflect our results of operations for the three and nine months ended September 30, 2011 and 2010 as prepared in accordance with generally accepted accounting principles in the United States of America (GAAP).

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2011 and 2010

The following table presents our results of operations for the three and nine months ended September 30, 2011 and 2010.

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Units sold

The following table presents our vehicle unit sales for the three and nine months ended September 30, 2011 and 2010.

Net sales

The decrease in net sales for the three and nine months ended September 30, 2011 as compared to the respective 2010 periods was attributable to a decrease in vehicle, modernization and spares and sustainment revenue primarily due to the timing of awards and related delivery of vehicles, products and services.

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

Cost of sales and Gross profit

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Gross profit decreased by $1.6 million and $24.1 million and the gross profit percentage increased by 3.3 and decreased by 2.6 percentage points for the three and nine months ended September 30, 2011, respectively, over the comparative 2010 periods.  The gross profit decreases were primarily due to: (1) the profit impact of lower sales volume (approximately $9.8 million for the quarter and $21.3 million year-to-date), (2) increased expenses for warranty and related issues and costs to obtain full material release on the Buffalo A2 program ($2.5 million for the quarter and $7.4 million year-to-date), (3) revenue recognized during the first quarter of 2011 that was related to a claim settlement and a development contract, both with minimal associated gross profits ($2.9 million negative impact for the year-to-date), (4) the results of certain contract negotiations (net positive impact of $1.9 million for the quarter and negative impact of $6.1 million year-to-date), (5) reduced profit margins on spares sales due to sales mix changes and lower selling prices resulting from increased competition (reduction of $2.4 million and $4.8 million for the quarter and year-to-date, respectively) and (6) severance and related costs which occurred in the first quarter of 2011 ($1.3 million reduction for the year-to-date).  These decreases were partially offset by the impact of improved profits on service and modernization revenues resulting from cost reductions and improved pricing ($8.6 million for the quarter and $15.3 million year-to-date) and decreased expenses from overhead reductions ($2.3 million for the quarter and $4.2 million year-to-date).  All other gross profit, net, increased $0.3 million and $0.2 million for the three and nine months ended September 30, 2011, respectively, from the comparable 2010 periods.

General and administrative expenses

General and administrative expenses decreased $8.0 million and $2.9 million for the three and nine months ended September 30, 2011, respectively, from the comparable 2010 periods.  The period-over-period decreases were primarily due to the $8.5 million charge during third quarter of 2010 for the estimated settlement cost of the federal shareholder class and derivative actions (See Note 10, Commitments and Contingencies, in the accompanying unaudited condensed consolidated financial statements) and partially offset by increased costs for business development (up $1.9 million for the quarter and $5.3 million year-to-date), reflecting increased bid and proposal preparation spending on new programs, including the Tactical Armoured Patrol Vehicle (TAPV), and the expansion of efforts to promote sales of our new and existing products in selected world-wide markets.  Additionally, our European operations incurred $1.3 million of increased costs during the nine months ended September 30, 2011 compared to the respective 2010 period in connection with the ramp-up of the Light Protected Patrol Vehicle (LPPV) program.  All other general and administrative expenses, net, decreased $1.4 million and $1.0 million for the three and nine months ended September 30, 2011, respectively, from the comparable 2010 periods.

Asset impairment expense

During the second quarter of 2011, we incurred a $3.2 million impairment charge related to our Roxboro, North Carolina training facility.  We are currently evaluating alternative uses for this facility.  See Note 4, Property and Equipment, in the accompanying unaudited condensed consolidated financial statements.

Research and development expenses

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Research and development expenses decreased by $2.0 million and increased by $0.2 million for the three and nine months ended September 30, 2011, respectively, over the comparable 2010 periods.  The period-over-period changes were primarily due to (1) a reduction in spending on the Ocelot program (down $2.2 million for the quarter and $4.5 million year-to-date) resulting from the timing of Ocelot product development activities, and (2) increased spending on vehicle system development programs for TAPV and JAMMA (up $1.1 million for the quarter and $6.1 million year-to-date).  Spending for all other development programs was down $0.9 million for the quarter and $1.4 million year-to-date.

Other (expense) income, net

Other expense, net decreased by $0.2 million and increased $0.2 million for the three and nine months ended September 30, 2011, respectively, as compared to the same periods for 2010, mostly due to the break-even results and $0.2 million loss on our joint venture, Integrated Survivability Technologies Limited (IST), for the three and nine months ended September 30, 2011, respectively, compared to the $0.2 million loss and break-even results for the three and the nine months ended September 30, 2010.

Interest expense, net

Interest expense, net was relatively flat for the three months ended September 30, 2011 compared to the same period for 2010.  This item for the nine months ended September 30, 2011, as compared to the same period for 2010, decreased by $0.1 million as a result of lower line of credit fees and amortization of loan renewal fees.

Income tax (expense) benefit