10-Q 1 a07-26059_110q.htm 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 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, 2007

 

 

 

 

 

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)

 

Nevada

 

84-1383888

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

9801 Highway 78, Building No. 1, Ladson, SC  29456

 (Address of principal executive offices) (zip code)

 

(843) 740-7015

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

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 number of shares outstanding of each of the registrant’s common stock, as of October 31, 2007: 68,247,649

 

 




 

PART I - Financial Information

 

Item 1.   Financial Statements

 

FORCE PROTECTION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(unaudited)

 

(in dollars)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(Restated)

 

 

 

(Restated)

 

Net sales

 

$

206,291,488

 

$

42,160,858

 

$

441,151,894

 

$

133,037,980

 

Cost of sales

 

165,678,182

 

34,242,350

 

345,252,174

 

108,324,917

 

Gross profit

 

40,613,306

 

7,918,508

 

95,899,720

 

24,713,063

 

 

 

 

 

 

 

 

 

 

 

General and administrative expense

 

20,029,739

 

6,715,419

 

50,642,242

 

20,421,207

 

Research and development expense

 

2,526,305

 

545,717

 

10,673,638

 

1,850,522

 

Operating profit

 

18,057,262

 

657,372

 

34,583,840

 

2,441,334

 

 

 

 

 

 

 

 

 

 

 

Other income

 

594,143

 

121,041

 

3,488,660

 

168,963

 

Interest expense

 

(61,979

)

(110,493

)

(141,570

)

(1,736,802

)

Net earnings before tax

 

18,589,426

 

667,920

 

37,930,930

 

873,495

 

 

 

 

 

 

 

 

 

 

 

Tax expense

 

7,227,855

 

 

14,413,753

 

 

Net earnings after tax

 

11,361,571

 

667,920

 

23,517,177

 

873,495

 

 

 

 

 

 

 

 

 

 

 

Series D convertible preferred stock dividend

 

 

(64,408

)

 

(325,685

)

Accretion of series D convertible preferred stock to redemption value

 

 

(363,569

)

 

(1,297,134

)

Net earnings (loss) available to common shareholders

 

$

11,361,571

 

$

239,943

 

$

23,517,177

 

$

(749,324

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.00

 

$

0.35

 

$

(0.02

)

Diluted

 

$

0.16

 

$

0.00

 

$

0.34

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute:

 

 

 

 

 

 

 

 

 

Basic

 

68,207,649

 

49,014,150

 

67,984,665

 

42,050,762

 

Diluted

 

68,929,117

 

49,014,150

 

68,913,511

 

42,050,762

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1



 

FORCE PROTECTION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in dollars)

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

(Restated)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

72,273,632

 

$

156,319,004

 

Accounts receivable, net of allowance for contractual obligations of $15,907,940 and $6,068,088 as of September 30, 2007 and December 31, 2006, respectively

 

37,757,524

 

36,011,568

 

Inventories

 

182,473,512

 

60,396,297

 

Prepaid asset

 

16,277,223

 

 

Current portion of deferred taxes

 

7,472,720

 

9,562,500

 

Other current assets

 

 

374,051

 

Total current assets

 

316,254,611

 

262,663,420

 

Long term portion of deferred taxes

 

59,875

 

2,763,991

 

Property and equipment, net

 

47,630,413

 

8,963,901

 

Intangible assets, net

 

1,581,944

 

 

Total assets

 

$

365,526,843

 

$

274,391,312

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

47,855,805

 

$

38,653,813

 

Other accrued liabilities

 

6,883,979

 

2,968,859

 

Contract liabilities

 

4,943,456

 

1,850,000

 

Current portion of long term liabilities

 

221,685

 

71,685

 

Current tax liability

 

8,984,968

 

 

Deferred revenue

 

52,303,293

 

12,824,211

 

Total current liabilities

 

121,193,186

 

56,368,568

 

 

 

 

 

 

 

Long-term debt

 

267,375

 

 

Other long term liabilities

 

77,085

 

167,937

 

Total liabilities

 

121,537,646

 

56,536,505

 

 

 

 

 

 

 

Commitments and Contingencies (See NOTE 13)

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized, 68,207,649 shares at September 30, 2007 and 66,762,566 shares at December 31, 2006 issued and outstanding

 

68,208

 

66,763

 

Par value of shares of common stock to be issued

 

40

 

31

 

Additional Paid-in Capital

 

251,812,713

 

249,694,850

 

Accumulated deficit

 

(7,891,764

)

(31,906,837

Total shareholders’ equity

 

243,989,197

 

217,854,807

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

365,526,843

 

$

274,391,312

 

 

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

 

2



 

FORCE PROTECTION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in dollars)

 

 

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

(Restated)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net earnings after taxes

 

$

23,517,177

 

$

873,495

 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,555,413

 

587,982

 

Deferred tax expense

 

4,793,896

 

 

Stock-based compensation (FAS 123R)

 

1,281,566

 

691,828

 

Other employee compensation paid in common stock

 

 

681,112

 

Common stock issued per settlement agreement

 

 

187,500

 

 

 

 

 

 

 

Increase (decrease) in allowance for contractual adjustments (definitization)

 

9,839,853

 

 

Increase (decrease) in inventory reserve

 

1,358,572

 

 

Increase (decrease) in contract liabilities – warranty reserve

 

3,093,456

 

188,976

 

 

 

 

 

 

 

Change in assets and liabilities:

 

 

 

 

 

Decrease (increase) in accounts receivable

 

(11,585,809

)

(12,537,358

)

Decrease (increase) in inventories

 

(123,435,787

)

(1,071,403

)

Decrease (increase) in prepaid assets

 

(16,277,223

)

0

 

Decrease (increase) in other current assets

 

374,051

 

(147,952

)

Increase (decrease) in accounts payable

 

9,201,992

 

7,596,440

 

Increase (decrease) in other accrued liabilities

 

3,915,120

 

43,561

 

Increase (decrease) in tax liability

 

8,984,968

 

 

Increase (decrease) in deferred revenue

 

39,479,082

 

(5,432,547

)

Net cash used in operating activities

 

(40,903,673

)

(8,338,366

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchase of property and equipment—intangibles

 

(1,550,000

)

 

Purchase of property and equipment

 

(42,803,869

)

(4,371,788

)

Net cash used in investing activities

 

(44,353,869

)

(4,371,788

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from exercise of options

 

1,335,647

 

 

Proceeds from the sale of common stock (net of issuance cost)

 

 

46,017,765

 

Preferred stock dividends paid in cash

 

 

(276,860

)

Increase in long term liabilities

 

117,375

 

 

Payment on loans, net

 

(150,000

)

(7,500,000

)

Payments on capitalized leases

 

(90,852

)

 

Net cash provided by financing activities

 

1,212,170

 

38,240,905

 

Net increase (decrease) in cash

 

(84,045,372

)

25,530,751

 

Cash and cash equivalents—beginning of period

 

156,319,004

 

1,217,509

 

Cash and cash equivalents—end of period

 

$

72,273,632

 

$

26,748,260

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

3



 

Cash paid for interest

 

$

141,570

 

$

1,736,802

 

Cash paid for taxes

 

$

700,000

 

$

 

Non-cash dividends and accretion on Series D convertible preferred stock

 

$

 

$

1,345,959

 

 

 

 

 

 

 

NON CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

Note payable issued as consideration for non-compete agreement

 

$

450,000

 

$

 

Conversion of Series D Preferred Stock into common stock

 

 

9,198,572

 

 

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

 

4



 

FORCE PROTECTION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

These notes are an integral part of the Company’s financial statements set forth above.

 

NOTE 1—BASIS OF PRESENTATION

 

The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K/A for Force Protection, Inc. and its subsidiaries for the year ended December 31, 2006, originally filed March 16, 2007, and as amended by our Annual Reports on Form 10-K/A filed with the SEC on June 11, 2007, July12, 2007 and October 15, 2007. The results of operations for the period ended September 30, 2007 are not necessarily indicative of the operating results which may be expected for a full year. The consolidated balance sheet as of December 31, 2006 contains financial information taken from the audited financial statements as of that date.

 

2006 Year End Amendment and Q3 Restatement

 

The financial information included in this Form 10-Q referring to the three and  nine months ended September 30, 2006 has been restated for the effects of stock-based compensation to employees, the effect on the basic earning per share (“EPS”) of accretion on preferred stock, and the calculation of weighted average common shares used to compute diluted earnings per share pursuant to the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” (“SFAS 123(R)”).

 

Effects of Restatement

 

Stock Based Compensation

 

The Company has restated its calculation of stock-based compensation pursuant to SFAS 123(R) for the three and nine months ended September 30, 2006. The impact is as follows:

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2006

 

September 30, 2006

 

Increase (decrease) in general and administrative cost

 

$

(65,222

)

$

297,585

 

Increase (decrease) in net earnings

 

$

65,222

 

$

(297,585

)

Increase (decrease) in net earnings available to common shareholders

 

$

65,222

 

$

(297,585

)

Increase (decrease) in basic earnings per common share

 

$

(0.00

)

$

(0.01

)

Increase (decrease) in diluted earnings per common share

 

$

(0.00

)

$

(0.01

)

 

Earnings Per Share

 

The Company has reviewed the FASB’s Statement of Financial Accounting Standard No. 128—”Earnings per Share,” (“SFAS 128”) and determined that income available to common shareholders did not include the accretion related to preferred stock and the weighted average number of common shares outstanding used to calculate diluted earnings per

 

5



 

share did not give effect to common shares issued upon conversion of the Series D convertible preferred stock for the three and nine months ended September 30, 2006. The impact is as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2006

 

September 30, 2006

 

(Decrease) in net earnings available to common shareholders

 

$

(427,977

)

$

(1,622,819

)

(Decrease) in basic earnings per common share

 

$

(0.01

)

$

(0.04

)

(Decrease) in diluted earnings per common share

 

$

(0.01

)

$

(0.04

)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of the Business

 

Force Protection, Inc. and its subsidiaries (the “Company”) design, manufacture and market blast and ballistics armored vehicles for sale to military and other customers, primarily the U.S. government.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Force Protection, Inc., and its two wholly-owned subsidiaries, Force Protection Industries, Inc. and Force Protection Technologies, Inc.  All material inter-company balances and transactions are eliminated in consolidation.

 

General Statement

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The SEC has issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” (“FRR 60”), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are both most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The methods, estimates, and judgments the Company uses in selecting and applying its most critical accounting policies have a significant impact on the results the Company reports in its financial statements. Estimates and assumptions are periodically reviewed by management, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

 

The Company believes the following critical accounting policies and procedures, among others, affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements:

 

Revenue Recognition

 

The Company’s revenue is derived principally from the sale of its vehicles, and, to a lesser extent, sale of associated spare parts and training services to the U.S. government. The Company recognizes revenue when earned under the unit of delivery method, pursuant to American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue from vehicle sales and spare part sales, net of an allowance for contractual adjustments, is recognized when the vehicles or spare parts

 

6



 

are delivered to and “formally” accepted by the customer. The Company defines “formal acceptance” under the U.S. government contract as taking place when a representative of the U.S. government signs the United States Form DD250 entitled “Material Inspection and Receiving Report.” Under the Federal Acquisition Regulation, a signed Form DD250 signifies contractual inspection and acceptance by the United States of the work performed by the Company.  A signed Form DD250 also acts as the contractual invoice obligating the U.S. government to pay the Company for the approved goods or services (subject to any “definitization” contractual adjustment(s), as discussed below).

 

In accordance with standard industry practice, there is a representative from the United States Defense Contract Management Agency (“DCMA”) acting as a contractual representative of the U.S. government present at the Company’s facilities.  This DCMA representative inspects each vehicle as it is delivered by the Company, and upon confirmation of the vehicle’s conformity with the contractual specifications, the inspector or other contractually designated official signs the Form DD250 and formally accepts delivery of the vehicle.  The Company only recognizes revenues arising from its U.S. government contracts upon execution of the Form DD250 by the DCMA inspector.

 

Under some of the Company’s U.S. government contracts, it receives performance-based payments based on completion of specific milestones stipulated under the contract (for example, delivery of raw material to the Company’s Ladson, South Carolina facility). These payments are recorded as “deferred revenue” and carried on the Company’s balance sheet until the final delivery of the products and formal acceptance by the U.S. government pursuant to the Form DD250. Upon acceptance of the products and the execution of the Form DD250, the Company recognizes the full sale price of the product as revenue.

 

Revenues from services provided are recorded in accordance with specific contractual terms.  Services have historically consisted of the Company providing both foreign and domestic user training, field support (including vehicle repairs), performing vehicle modifications, and providing test support to the U.S. government for its vehicle testing.

 

The Company negotiates contracts with its customers that may include revenue arrangements with multiple deliverables, as outlined by Emerging Issues Task Force No. 00-21 (“EITF 00-21”).  The Company’s accounting policies are defined such that each deliverable under a contract is accounted for separately.  Historically, the Company has negotiated and signed contracts with its customers who outline the contract amount and specific terms and conditions associated with each deliverable.

 

Allowance for Contractual Adjustments - Definitization

 

The Company’s contracts with the U.S. government are negotiated as either a “sole source” or “open competition” bid process.  A sole source process is one in which the Company is the sole bidder for the contract.  An open competition could involve various bidders.  Once a bid is accepted, the U.S. government usually expects work to commence immediately.  An open competition results in a final agreed-upon contract price to which the U.S. government has agreed.  A sole source process results in an agreed-upon contract with the U.S. government, subject to an adjustment process at a later date, termed the “definitization process.” The definitization process commences upon delivery of a product, whereby the U.S. government completes a detailed review of the Company’s costs involved in the manufacturing and delivery process.  The U.S. government and the Company then work to determine an adequate and fair final contract price. We have the right to submit proposed prices, but they are subject to final review and approval by the contracting officer, who may require that we use different prices. In addition, if an agreement is not reached as to price by a specific date, the contracting officer may unilaterally determine a price. During definitization, we are usually required to perform the contract work and make deliveries before the final contract price has been established.

 

As a result of the potential adjustments related to the definitization process, the Company maintains an allowance in a contractual adjustments account, which is accounted for as a deduction from gross sales to arrive at net sales in

 

7



 

accordance with Accounting Research Bulletin (“ARB”) 43, Chapter 11.  This allowance account is reviewed quarterly and is adjusted as the Company deems necessary.  The allowance is maintained and deemed adequate based on the analysis of historical data, and a calculation of pro-rata percentages of current contracts in place that remain subject to the definitization process. See NOTE 15, Allowance and Reserve Accounts.

 

Historically, the Company has not encountered sales returns.  The Company does not anticipate sales returns in the future.

 

Research and Development

 

Research, development, and engineering costs are expensed as incurred, in accordance with SFAS No. 2, Accounting for Research and Development Costs.  Research, development, and engineering expenses primarily include payroll and personnel related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.

 

Inventories

 

Inventories are stated at the lower of cost or market, pursuant to ARB 43, Chapter 4, Inventory Pricing, as amended. The Company accounts for its inventory costs under the first-in-first-out valuation method.  An allowance for obsolescence and shrinkage is maintained by the Company.  The Company determines an appropriate balance in this account based on historical data and specific identification of certain inventory items. See NOTE 8, Inventories.

 

Property and Equipment & Depreciation

 

Property and equipment are stated at cost. The Company capitalizes additions and improvements which include all material, labor and engineering cost to design, install or improve the asset. Routine repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:

 

Leasehold improvements

 

2-5 years

 

Furniture and fixtures

 

3 years

 

Machinery and equipment

 

7 years

 

Tooling and molds

 

7 years

 

Vehicles

 

5 years

 

Buildings

 

29 years

 

 

Amounts paid for construction in progress projects are not depreciated until placed in service. See NOTE 9, Property and Equipment, and NOTE 10, Asset Acquisitions and Construction in Progress Payments.

 

Joint Venture – Force Dynamics LLC

 

On December 15, 2006, the Company entered into a joint venture agreement (the “Agreement”) with General Dynamics Land Systems Inc. (“GDLS”), pursuant to which a Delaware limited liability company named Force Dynamics LLC was formed. The Company agreed to work with GDLS to pursue and execute contracts for the Mine Resistant Ambush Protected (“MRAP”) Vehicle Program. Under the Agreement, the MRAP Program is defined to include any and all solicitations and requests for proposals for MRAP production and lifecycle support and/or any follow-on work that may be performed related to the MRAP vehicles. However, the Agreement provides that the scope of work to be undertaken by the joint venture is limited to the use of the Company’s Cougar 4-wheeled and 6-wheeled armored vehicles for the MRAP Category I and Category II requirements, and the MRAP Category II vehicle requirements do not include any other

 

8



 

existing or future contracts or programs for any of the Company’s or GDLS’ other vehicles. The joint venture was amended on March 28, 2007 to include bids for awards under the Medium Mine Protective Vehicle, or MMPV, Program.  The joint venture submitted a proposal for awards under the MMPV Program.  On October 23, 2007, the joint venture was notified that its proposal would not be accepted and it would not receive awards under the MMPV program as a result of the proposal’s noncompliance to the solicitation.

 

The board of the joint venture is comprised of three designees from the Company and three designees from GDLS. The board of the joint venture has the authority to execute documents in accordance with the terms of the Agreement. Decisions of the joint venture’s board shall be made by majority vote. It is contemplated that the Company and GDLS will each handle 50% of the manufacturing and other work required under the joint venture (with the divisional work to be based on revenues rather than number of vehicles), although the Agreement indicates that the work may not be allocated 50% - 50% initially. Both the Company and GDLS are expected to contribute administrative resources equally to the joint venture. It is expected that, where practicable, Force Dynamics LLC will act as the prime contractor for joint venture work, and the Company, along with GDLS, shall act as the exclusive subcontractors.

 

We are currently seeking to have our MRAP contract with the U.S. Marine Corps assigned or “novated from” Force Protection, Inc. to Force Dynamics LLC, the joint venture. Because this contract was awarded to the Company and has not yet been novated to the joint venture, 100% of the revenues from the MRAP contract (including revenue from vehicles manufactured by GDLS) have been included as net sales in our financial statements, and will continue to be included until such time as the MRAP contract is novated to the joint venture, at which point we will recognize revenues only from vehicles subcontracted by the joint venture that we actually manufacture. Per the current subcontract agreement with GDLS, included in the Company cost of sales, (and until the MRAP contract is novated will continue to include), is an amount equal to 100% of revenues from vehicles manufactured by GDLS. To offset the inclusion of revenue from vehicles manufactured by GDLS in our net sales, in our financial statements, we have also included (and, until the contract is novated, will continue to include) an amount equal to 100% of the revenues from vehicles manufactured by GDLS as cost of sales in our financial statements. Notwithstanding the inclusion of revenues from vehicles manufactured by GDLS in net sales . GDLS is entitled to all of the revenue from vehicles manufactured by GDLS pursuant to the joint venture. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this report for a discussion of the joint venture’s impact on the Company’s net sales, cost of sales, gross profit, and net income.

 

Stock-Based Compensation

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123(R), Share-Based Payment, which establishes accounting standards for transactions in which an entity receives employee services in exchange for (a) equity instruments of the entity or (b) liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of equity instruments. Effective July 1, 2005, the Company adopted SFAS 123(R), which requires the Company to recognize the grant-date fair value of stock options and equity based compensation issued to employees in the statement of operations as an expense in an amount equal to the estimated value of stock options granted over the time period the stock options vest. The statement also requires that such transactions be accounted for using the fair-value-based method, thereby eliminating use of the intrinsic method of accounting in APB No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. See NOTE 4, Stock Options and Stock Grants.

 

Deferred Revenue

 

Certain vehicle sales contracts the Company has with the U.S. government provides for performance based payments in accordance with agreed milestones. These payments received from the U.S. government are recorded by the Company as deferred revenue, a liability, since they represent moneys that will ultimately be recognized as revenues after the Company has manufactured and the customer has accepted delivery of the completed product. This accounting treatment is in accordance with the FASB’s Statement of Financial Concepts No. 6 (“SFAC 6”), Elements of Financial Statements.

 

9



 

Recent Accounting Pronouncements

 

In June 2006, the FASB issued FIN No. 48 “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN No. 48 established a single model to address accounting for uncertain tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on de-recognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN No. 48 was effective for the Company in the first quarter of fiscal 2007.  The adoption of FIN No. 48 did not have a material effect on the Company’s financial position, results of operations or cash flows.

 

In December 2006, the FASB issued a Staff Position (“FSP”) on EITF 00-19-2, “Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”).”  This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.”  If the transfer of consideration under a registration payment arrangement is probable and can be reasonably estimated at inception, the contingent liability under the registration payment arrangements is included in the allocation of proceeds from the related financing transaction (or recorded subsequent to the inception of a prior financing transaction) using the measurement guidance in SFAS No. 5.  This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the issuance of the FSP.  For prior arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006 and interim periods within those years.  The Company adopted FSP EITF 00-19-2 effective January 1, 2007.  See NOTE 12, Other Accrued Liabilities.

 

In September 2006, the SEC issued SAB No. 108, Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for the Company beginning June 11, 2007. The adoption of SAB No. 108 is not expected to have a material impact on the Company’s consolidated financial statements. The Company has reported the impact of having filed amended Forms 10-K for preceding years in NOTE 1.

 

In September 2006, the FASB issued SFAS 157, Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value under GAAP, and requires expanded disclosures regarding fair value measurements. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, or earlier in 2007 if the Company elected early adoption, which the Company did not elect. The Company believes it is unlikely it will expand its use of fair value measurements upon the January 1, 2008 effective date.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of SFAS No. 115.”  This statement permits, but does not require, entities to measure many financial instruments at fair value.  The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings.  This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments.  One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value.  With respect to SFAS No. 115, available for sale and held to maturity securities at the effective date are eligible for the fair value option at that date.  If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities.  SFAS No. 159 is effective for the Company on

 

10



 

January 1, 2008.  Earlier adoption is permitted in 2007 if the Company also elects to apply the provisions of SFAS No. 157.  The Company did not early adopt SFAS No. 159 and believes that it is unlikely that it will expand its use of fair value accounting upon the January 1, 2008 effective date.

 

NOTE 3 — CONCENTRATIONS:  Revenues and Accounts Receivable

 

The Company’s future operations and continued expansion is subject to a significant concentration risk due to its high percentage of military sales to the U.S. government.

 

The Company’s revenues from sales to military units of the U.S. government during the three months ended September 30, 2007 and September 30, 2006 accounted for 98% and 92%, respectively, of total revenues.  During the nine months ended September 30, 2007 and September 30, 2006, the Company’s revenues from sales to military units of the U.S. government accounted for 97% and 92%, respectively, of total revenues.

 

The Company’s accounts receivable from sales to military units of the U.S. government as of September 30, 2007 and December 31, 2006 amounted to 94% and 95%, respectively, of total accounts receivable.

 

NOTE 4 — STOCK OPTIONS AND STOCK GRANTS

 

The Company does not have a formal stock option plan. However, the Company has issued stock options (“Stock Options”) and shares of common stock (“Stock Grants”) to some of its employees. During 2006 and 2005, the Company issued stock options to purchase 1,508,125 and 652,833 shares of its unregistered common stock, respectively. No stock options were issued in 2007. On January 12, 2007, the Company filed a Registration Statement on Form S-8 to register 1,972,291 shares of common stock issuable upon the exercise of the outstanding Stock Options for the sale in public markets. During 2007, the Company did not make any Stock Options grants, and at the nine months ended September 30, 2007 there were outstanding Stock Options totaling 548,532 shares of common stock.

 

STOCK OPTION EXPENSE:

 

Stock option expense includes the expense associated with both stock options granted to employees and also the expense associated with stock grants issued to employees and is recognized in operating results (included in general, and administrative expenses) under SFAS 123R. For the three and nine months ended September 30, 2007, stock option expense was as follows:

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(Restated)

 

 

 

(Restated)

 

Stock option expense

 

$

420,661

 

$

329,021

 

$

1,281,566

 

$

691,828

 

 

11



 

The following table summarizes information about stock option activity based upon the weighted average method for the three and nine months ended September 30, 2007.

 

Options

 

Common
stock shares
subject to
options

 

Weighted
average
exercise price

 

Remaining
contractual
term

 

Aggregate
intrinsic value

 

Outstanding at December 31, 2006

 

1,959,443

 

$

2.63

 

2.60

 

$

37,286,034

 

Options granted

 

 

 

 

 

 

 

 

Options exercised

 

(1,410,911

)

$

0.95

 

 

 

 

 

Outstanding at September 30, 2007

 

548,532

 

$

6.96

 

3.08

 

$

8,062,407

 

 

 

 

 

 

 

 

 

 

 

Vested and Exercisable at September 30, 2007

 

423,532

 

$

6.79

 

2.98

 

$

6,295,907

 

 

The aggregated intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $21.66 of our common stock on September 28, 2007.  The aggregate intrinsic value is provided for informational purposes only.  All stock options are recorded using the fair value methodology mandated under SFAS 123(R).

 

The following table summarizes the attributes used by the Company to determine compensation cost for stock options consistent with requirements of SFAS 123R. No stock options were granted during the three or nine month periods ended September 30, 2007.

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

Valuation assumptions

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

Restated

 

 

 

Restated

 

Stock price on date of grant

 

 

 

 

$

0.77 - $7.48

 

Exercise price

 

 

 

 

$

0.72 - $7.48

 

Expected option term (in years)

 

 

 

 

2

 

Expected duration from grant to expiration date (in years)

 

 

 

 

4 and 5

 

Option vesting term (in years)

 

 

 

 

 

(a)

Expected volatility

 

 

 

 

45.82-70.31

%

Risk-free interest rate

 

 

 

 

4.40-4.97

%

Expected forfeiture rate

 

 

 

 

5

%

Estimated corporate tax rate

 

 

 

 

38.5

%

Expected dividend yield

 

 

 

 

0

%

 


(a) Options vest between 1 day and 14 months.

 

STOCK GRANTS:

 

During 2007, the Company did not make any Stock Grants, and at the nine months ended September 30, 2007 there were outstanding Stock Grants totaling 120,513 shares of common stock.

 

Stock option expense attributable to Stock Grants is included within the total amount of stock option expense reported above under Stock Option Expense. The Stock Grant expense attributable to Stock Grants for the three and nine months ended September 30, 2007, was as follows: 

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(Restated)

 

 

 

(Restated)

 

Stock option expense – stock grants

 

91,000

 

$

262,250

 

283,000

 

$

277,250

 

 

12



 

The following table summarizes supplemental information about non-vested stock grants activity for the nine months ended September 30, 2007.

 

Non-vested shares

 

Number of
shares

 

Weighted average
per share grant
price

 

Outstanding December 31, 2006

 

191,026

 

$

5.48

 

Shares granted

 

 

 

Shares vested

 

(70,513

6.45

 

Outstanding September 30, 2007

 

120,513

 

$

5.14

 

 

NOTE 5 — INCOME TAXES

 

The FASB has issued Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.

 

The Company’s net deferred tax asset consists of the following as of:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

(Restated)

 

Net deferred tax asset (liability)

 

 

 

 

 

Provisions and allowances

 

$

7,472,720

 

$

5,745,308

 

Property and equipment

 

59,875

 

(268,110

)

Net operating loss carry forwards

 

 

6,849,293

 

 

 

7,532,595

 

12,326,491

 

Valuation allowance

 

 

 

Deferred tax asset

 

$

7,532,595

 

$

12,326,491

 

 

 

 

 

 

 

Current portion of deferred taxes

 

$

7,472,720

 

$

9,562,500

 

Long-term portion of deferred taxes

 

59,875

 

2,763,991

 

Total deferred taxes

 

$

7,532,595

 

$

12,326,491

 

 

As of December 31, 2006, there were federal net operating loss carry forwards of $17,730,065 available to offset future taxable income and South Carolina net operating loss carry forwards of $6,581,521.  All net operating losses are expected to be utilized for the year ended December 31, 2007.

 

The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Consolidated Statements of Operations:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2007

 

September 30, 2006 

 

September 30, 2007

 

September 30, 2006

 

 

 

 

 

Restated

 

 

 

Restated

 

Tax expense benefit at statutory rate-federal

 

35.00

%

35.00

%

35.00

%

35.00

%

State tax expense, net of federal benefit

 

3.25

%

3.25

%

3.25

%

3.25

%

Other permanent differences

 

.65

%

 

(.25

)%

 

Changes in valuation allowance

 

%

(38.25

)%

%

(38.25

)%

Tax expense at actual rate

 

38.90

%

%

38.00

%

%

 

13



 

NOTE 6 — EARNINGS/LOSS PER SHARE

 

The Company utilizes SFAS No. 128, “Earnings per Share” to calculate earnings/loss per share for 2007 and comparative amounts for 2006. Basic earnings/loss per share is computed by dividing the earnings/loss available to common shareholders (as the numerator) by the weighted-average number of common shares outstanding (as the denominator). Diluted earnings/loss per share is computed similar to basic earnings/loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potential common stock (including common stock equivalents) had all been issued, and if such additional common shares were dilutive.

 

Under SFAS No. 128, where there is a loss the inclusion of additional common shares is anti-dilutive (since the increased number of shares reduces the per share loss available to common stockholders), and if the additional common shares are anti-dilutive, they are not added to the denominator in the calculation of the fully-dilutive stock  During the nine months ended September 30, 2006, the Company incurred a loss. For the three and nine month periods ended September 30, 2006 the following common stock equivalents have been excluded from the calculation of the diluted loss per share.

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2006

 

September 30, 2006

 

 

 

Restated

 

Restated

 

Series D convertible preferred stock

 

1,161,364

 

3,128,275

 

Warrants

 

892,495

 

1,771,982

 

Options

 

1,463,514

 

1,456,188

 

Stock Grants

 

180,244

 

72,618

 

Total

 

3,697,617

 

6,429,063

 

 

Earnings Per Share Computation

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(Restated)

 

 

 

(Restated)

 

Basic earning (loss) per common share computation

 

 

 

 

 

 

 

 

 

Net earnings (loss) available to common shareholders

 

$

11,361,571

 

$

239,943

 

$

23,517,177

 

$

(749,324

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted- average shares used to compute:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

68,207,649

 

49,014,150

 

67,984,665

 

42,050,762

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.00

 

$

0.35

 

$

(0.02

)

 

14



 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(Restated)

 

 

 

(Restated)

 

Dilutive earning (loss) per common share computation

 

 

 

 

 

 

 

 

 

Net earnings (loss) available to common shareholders

 

$

11,361,571

 

$

239,943

 

$

23,517,177

 

$

(749,324

)

 

 

 

 

 

 

 

 

 

 

Weighted- average shares used to compute:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

68,207,649

 

49,014,150

 

67,984,665

 

42,050,762

 

Dilutive effect of stock options

 

587,440

 

Anti-dilutive

 

795,057

 

Anti-dilutive

 

Dilutive effect of stock grants

 

134,028

 

Anti-dilutive

 

133,789

 

Anti-dilutive

 

Dilutive weighted average share

 

68,929,117

 

49,014,150

 

68,913,511

 

42,050,762

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

Assuming dilution

 

$

0.16

 

$

0.00

 

$

0.34

 

$

(0.02

)

 

NOTE 7 — ALLOWANCE FOR CONTRACTUAL ADJUSTMENTS

 

Accounts Receivable and “Definitization”

 

Substantially all of the Company’s contracts are with the U.S. government and as such they are “public sector” contracts subject to the Federal Acquisition Regulation set forth in Title 41 of the United States Code (“FAR”). Public sector contracts may result either from competitive bidding, or may be awarded as “sole source” contracts subject to “definitization” as provided under FAR Section
252.217-7027.

 

Following the award of a sole source contract, a central component of the definitization process is the negotiation and finalization of the contract price between the contractor and the United States contracting officer.  As part of this process, the parties make a mutual determination of the direct material and labor costs for the work based upon the bill of materials and other purchasing information and then the parties mutually agree upon “rates” for the indirect labor costs and the general and administrative costs and upon a “fee” (or profit).  While the direct material costs and labor can be established through objective evidence, the “rates” and fee are more subjective and are based upon an analysis of multiple factors including historical performance data and projected operational factors.  The contractor has the right to submit proposed rates and fees, but these are subject to final review and approval by the contracting officer, who may insist on using alternate rates and fee.  As provided in FAR section 252.217-7027(c):

 

If agreement on a definitive contract action to supersede this undefinitized contract action is not reached by the target date in paragraph (b) of this clause, or within any extension of it granted by the Contracting Officer, the Contracting Officer may, with the approval of the head of the contracting activity, determine a reasonable price or fee in accordance with subpart 15.4 and part 31 of the FAR, subject to Contractor appeal as provided in the Disputes clause.

 

Finally, although both parties make an effort to definitize the contract as quickly as possible, the process is time consuming and can take months or even years to complete.  During the definitization process, the contractor is required to perform the contract work and to make deliveries under the contract before the final contract price has been established.  For this reason, as part of the original award, the Company bills the U.S. government at a predetermined price that is used for invoicing and accounting purposes pending final definitization.

 

As a result of the potential adjustments related to the definitization process, the Company maintains an allowance for contractual adjustments account that is subtracted from gross sales to arrive at net sales in accordance with ARB 43, Chapter 11.  This allowance account is reviewed on a quarterly basis and is adjusted as the Company deems necessary.  The allowance is based on the analysis of historical data, and calculation of pro-rata percentages of current contracts in place that remain subject to the definitization process.

 

Below is a table detailing activity within the allowance for contractual adjustments account for the nine months ended September 30, 2007 and September 30, 2006, respectively.

 

15



 

 

 

For the nine months ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

(Restated)

 

Beginning Balance- January 1

 

$

6,068,088

 

$

1,018,051

 

Additions to allowance

 

19,474,461

 

1,485,733

 

Reduction to allowance

 

(9,634,609

)

(1,236,743

)

Balance—September 30

 

$

15,907,940

 

$

1,267,041

 

 

The Company’s MRAP sole source contract was definitized on July 31, 2007. The increase in the allowance for contractual adjustments as of September 30, 2007 is due primarily to adjust the undefinitized price to the definitized price for sales recorded through September 30, 2007.

 

The Company does not maintain an allowance for doubtful accounts.  Substantially all of the Company’s sales for the quarters ended September 30, 2007 and September 30, 2006 involved contracts with the U.S. government.

 

Historically, the Company has not encountered sales returns.  The Company does not anticipate sales returns in the future.

 

NOTE 8—INVENTORIES

 

Inventories consisted of the following:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

(Restated)

 

Finished Goods

 

$

 1,715,695

 

$

 —

 

Raw materials and supplies

 

137,365,409

 

45,131,126

 

Work in process

 

47,174,593

 

17,688,784

 

Less: Allowance for obsolescence and shrinkage

 

(3,782,185

)

(2,423,613

)

Net Inventories

 

$

182,473,512

 

$

60,396,297

 

 

Inventory Allowance

 

The Company maintains inventory reserves to account for obsolescence and waste. The inventory reserve amounts reflected above represent expenses for inventory obsolescence and waste recorded by the Company.

 

As of September 30, 2007 there were vehicles which had been inspected and accepted by the customer but the customer had not taken title (signed Form DD250). These vehicles were accounted for as finished goods.

 

NOTE 9—PROPERTY AND EQUIPMENT

 

Property and Equipment at September 30, 2007 and December 31, 2006:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

(Restated)

 

Furniture and fixtures

 

$

3,607,625

 

$

1,022,984

 

Leasehold improvements

 

11,518,066

 

1,534,057

 

Machinery and equipment

 

6,032,699

 

3,794,209

 

Manuals

 

704,798

 

104,797

 

Vehicles

 

468,344

 

143,464

 

Demo vehicles

 

1,530,605

 

1,095,925

 

Buildings

 

6,013,111

 

 

Construction in progress

 

13,265,474

 

 

Land

 

3,420,000

 

 

Computers and software

 

6,695,715

 

2,757,131

 

Less depreciation and amortization

 

(5,626,024

)

(1,488,666

)

 

 

 

 

 

 

Net property and equipment

 

$

47,630,413

 

$

8,963,901

 

 

16



 

Leasehold Improvements and Depreciation

 

In addition to leasehold expenditures for the warehouse facility discussed in NOTE 10, the Company incurred $1,443,000 for leasehold improvements that were primarily attributable to renovations made to buildings at Ladson, SC.

 

Depreciation expense for property and equipment for the nine months ended September 30, 2007 and for 2006 was $4,137,358 and $587,982, respectively.

 

See NOTE 10 — Asset Acquisitions and Construction in Progress Payments for a description of the Company’s purchase of its Roxboro, NC facility and construction in progress payments made during the current quarter.

 

NOTE 10 —ASSET ACQUISITIONS AND CONSTRUCTION IN PROGRESS PAYMENTS

 

Roxboro, NC Manufacturing Plant Purchase

 

In July 2007, the Company purchased land and an approximately 430,000 square foot building in Roxboro, NC for $3.5 million, which it plans to use as a manufacturing plant.  The Company acquired the property for cash.

 

Construction in Progress Payments

 

The Company paid approximately $10 million for construction in progress payments during the third quarter of 2007. These payments were primarily to construct assembly lines at both its Ladson, SC and Roxboro, NC manufacturing plants:

 

                  In June 2007, the Company made a down payment of $1,529,836 to Superior Controls of Plymouth, Michigan to begin work on a vehicle assembly line (the estimated total cost of which is approximately $15.3 million) at the Ladson, SC facility. During the third quarter, the Company made additional progress payments to Superior Controls totaling $6,119,345, which are being accounted for as construction in progress payments.

 

                  During the third quarter of 2007, the Company made a down payment of $4,356,555 to Tecstar of Troy, Michigan to begin work on a vehicle assembly line (the estimated total cost of which is approximately $12.9 million) at the recently purchased Roxboro, NC facility. The down payment and future payments will be accounted for as construction in progress payments.

 

During the third quarter of 2007, the Company completed construction on an approximately 90,000 square foot warehouse facility at its corporate headquarters in Ladson, SC The Company paid $350,000 in construction in progress payments in the third quarter of 2007 to complete construction. The total cost of construction was $4,621,207, and was capitalized at the time of completion when placed into service in July 2007.

 

17



 

NOTE 11 — ACQUIRED INTANGIBLE ASSETS

 

The following is a summary of the Company’s intangible assets at September 30, 2007, after giving effect to the acquisition of a research and development testing facility located in Edgefield, SC in March 2007:

 

 

 

Gross carrying

 

Accumulated

 

September 30, 2007

 

 

 

amount

 

amortization

 

net book value

 

Licenses

 

$

800,000

 

$

155,556

 

$

644,444

 

Non-compete agreement

 

600,000

 

87,500

 

512,500

 

Customer base

 

200,000

 

58,333

 

141,667

 

Special expertise

 

400,000

 

116,667

 

283,333

 

Total

 

$

2,000,000

 

$

418,056

 

$

1,581,944

 

 

NOTE 12—OTHER ACCRUED LIABILITIES

 

The Company’s other accrued liabilities are comprised of the following accounts:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

(Restated)

 

Compensation and benefits

 

$

3,492,595

 

$

1,222,143

 

Vehicle fee payable

 

1,876,293

 

1,139,250

 

Settlement

 

 

607,466

 

Liquidated damages

 

1,459,573

 

 

Other misc. payables

 

55,518

 

 

 

 

 

 

 

 

 

 

$

6,883,979

 

$

2,968,859

 

 

Compensation and Benefits - Gain Share Program

 

The compensation and benefits accrued liabilities account balance includes wages and benefits that were earned at the end of the applicable quarter, and not yet paid. Additionally, the compensation and benefits account balance may include an accrued liability amount attributable to the Company’s gain share program for quarters in which gain share was approved but not paid. The gain share program was authorized by the Board of Directors on March 1, 2007 and provides for additional compensation that is paid quarterly to employees during periods in which the Company earns net income. Under the gain share program, the Company distributes 10% of each quarter’s net earnings (after taxes) equally to all employees.

 

Liquidated Damages

 

On December 20, 2006, the Company completed a private placement of 13,000,000 shares of its common stock to institutional investors at $11.75 per share, resulting in gross proceeds of $152,750,000.  The proceeds, net of commissions, were $146,640,000. Per the Securities Purchase Agreement, the Company agreed to file a registration statement to register all 13,000,000 shares of common stock for resale and distribution under the Securities Act of 1933, as amended, within 30 calendar days thereafter (January 19, 2007) and cause the registration statement to be declared effective by the SEC  no later than 120 calendar days thereafter (April 19, 2007). If the registration statement registering these shares was not declared effective on or before the applicable date, then the Company was required to deliver to each purchaser, as liquidated damages, an amount equal to one and one third percent (1 1/3%) for each thirty (30) days (or such lesser pro-rata amount for any period of less than thirty (30) days) of the total purchase price of the securities purchased and still held by such purchaser pursuant to the Securities Purchase Agreement on the first day of each thirty (30) day or

 

18



 

shorter period for which liquidated damages were calculable. The registration statement for the shares issued became effective July 26, 2007. After conversations with members of the Staff of the SEC, the Company filed amended Annual Reports on Form 10-K for the years ended December 31, 2005 and 2006, which were filed with the SEC on October 15, 2007. On October 15, 2007, the Company filed a prospectus supplement with respect to the registration statement.

 

In accordance with FSP EITF 00-19-2 — Accounting for Registration Payment Arrangements, the Company recorded $4,860,658 during the three months ended March 31, 2007 based on its original estimate of the time it would take to effectuate the registration of common stock. The Company recorded an additional charge for liquidated damages of $1,775,820 for the three months ended June 30, 2007. As of the quarter ended September 30, 2007, the Company had incurred an additional $830,365 in liquidated damages charges accrued through the effective date of October 15, 2007. Liquidated damage expense for the three and nine months ended September 30, 2007 was $830,365 and $7,466,843, respectively.

 

 NOTE 13—COMMITMENTS AND CONTINGENCIES

 

Financing Commitments - $50 Million Credit Facility

 

On July 20, 2007, the Company entered into a $50 million revolving credit agreement with Wachovia Bank, National Association. Borrowings under the credit agreement bear interest at a floating rate per annum equal to the 1-month LIBOR-rate  plus 2.0%. All amounts payable under this credit agreement were originally due and payable on September 30, 2007. However, the Company entered into a modification agreement with the lender which extended the maturity of the credit agreement to January 9, 2008. Amounts payable under the credit agreement are secured by a pledge of all the Company’s personal property and fixtures. As of September 30, 2007, no borrowings were outstanding under the credit agreement.

 

There are no assurances that Wachovia will extend the terms of this financing agreement beyond January 9, 2008. See “Management’s Discussion and Analysis of Financial Condition and Results from Operations - Liquidity And Capital Resources” in Part I, Item 2 of this report for additional information.

 

Contract Liabilities – Warranty Reserves

 

The Company’s sales contracts generally include a warranty such that the Company’s products are warranted to be free from defects in design, material, and workmanship for a period of one year from the acceptance date.  The warranty does not apply to any damage or failure to perform caused by the misuse or abuse of the vehicle, combat damage, fair wear and tear items (brake shoes, wiper blades, etc.), or by the customer’s failure to perform proper maintenance or service on the supplies.

 

The Company reviews its exposure for warranty expense on a quarterly basis and determines warranty and pricing reserves based on historical data and known events. As of September 30, 2007, the current contract liabilities – warranty reserves balance equaled $4,943,456. See NOTE 15, which provides a presentation of the Company’s accruals for warranty-related costs for 2007 and comparative amounts for 2006.

 

Litigation Matters

 

The Company is not aware of any existing or threatened litigation that would require the accrual of a contingent liability under SFAS 5, “Accounting For Contingencies.”  See “Legal Proceedings” in Part II, Item I of this report.

 

19



 

NOTE 14—SHAREHOLDERS’ EQUITY

 

During the three months ended March 31, 2007, the Company recorded the following transactions within its shareholders’ equity accounts:

 

      27,700 shares were cancelled relating to the December 2006 PIPE (Private Investment in Public Equity) offering.

 

      50,000 shares of common stock granted in June 2006 to an employee vested and were issued on January 1, 2007. The valuation of these shares was recorded in 2006 under SFAS123R.

 

      26,789 shares of common stock were issued to members of the Board of Directors as 2006 compensation. These shares were classified as shares to be issued as December 31, 2006.

 

      Employees exercised stock options to purchase 1,198,681 shares of the Company’s common stock valued at $1,011,500. The valuation of these shares was recorded in 2006 under SFAS123R.

 

During the three months ended June 30, 2007, the Company recorded the following transactions within its shareholders’ equity accounts:

 

      Employees exercised stock options to purchase 176,800 shares of the Company’s common stock valued at $295,970. The valuation of these shares was recorded under SFAS123R.

 

During the three months ended September 30, 2007, the Company recorded the following transactions within its shareholders’ equity accounts:

 

                  Employees exercised stock options to purchase 40,000 shares of the Company’s common stock for $60,000 during September 2007. These shares of common stock had not been issued as of September 30, 2007.

 

20



 

NOTE 15 — ALLOWANCE AND RESERVE ACCOUNTS

 

The three allowance and reserve accounts listed below reflect accounts where the Company has recorded an expense under the accrual method of accounting, which did not require an outlay of cash. The following table reflects the amounts of these accounts for the years for the three months and nine months ended September 30, 2006 and 2007:

 

Allowance and Reserve Accounts

 

 

 

For the three months ended September 30,

 

 

 

For the nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

Additions

 

 

 

Balance

 

Balance

 

charged to

 

 

 

Balance

 

 

 

Balance

 

charged to cost

 

 

 

September 30,

 

December 31, 

 

 cost

 

 

 

September

 

Description

 

June 30, 2007

 

and expenses

 

Write-offs

 

2007

 

2006

 

and expenses

 

Write-offs

 

30, 2007

 

 

 

 

 

 

 

 

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for contractual obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

$

12,301,428

 

$

4,043,255

 

$

436,743

 

$

15,907,940

 

$

6,068,088

 

$

19,474,461

 

$

9,634,609

 

$

15,907,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

1,194,040

 

$

400,000

 

$

326,999

 

$

1,267,041

 

$

1,018,051

 

$

1,485,733

 

1,236,743

 

$

1,267,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory Reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

$

5,708,420

 

$

3,782,185

 

$

5,708,420

 

$

3,782,185

 

$

2,423,613

 

$

10,621,588

 

$

9,263,016

 

$

3,782,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

2,005,940

 

$

1,159,540

 

$

1,674,647

 

$

1,490,833

 

$

498,281

 

$

3,884,187

 

$

2,891,635

 

$

1,490,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

$

4,397,653

 

$

3,187,289

 

$

2,641,486

 

$

4,943,456

 

$

1,850,000

 

$

6,286,762

 

$

3,193,306

 

$

4,943,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

742,328

 

$

59,710

 

$

150,000

 

$

652,038

 

$

380,044

 

$

633,936

 

$

361,942

 

$

652,038

 

 

21



 

NOTE 16—PREPAID ASSETS

 

The Company’s prepaid assets consist of advances paid on the MRAP contract to GDLS based upon the achievement of contractual performance milestones. These advances are a flow through from the Company’s contract with the U.S. government.

 

A review of the milestone achievements is performed monthly by a representative of the U.S. government. Payments for milestones achieved by GDLS are paid to the Company, which it in turn passes through to GDLS. Liquidation of the advances are based upon a fixed rate applied against billings to the Company by GDLS when completed vehicles are accepted by the U.S. government via the signing of a Form DD250.

 

Prepaid assets

 

September 30, 2007

 

December 31, 2006 

 

 

 

 

 

(Restated)

 

Prepaid to GDLS

 

$

15,645,299

 

$

 

Other

 

631,924

 

 

Total

 

$

16,277,223

 

$

 

 

NOTE 17—DEFERRED REVENUE

 

The Company’s deferred revenue consists of the following contracts:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

(Restated)

 

 

 

 

 

 

 

MRAP

 

$

48,065,101

 

$

 

ILAV

 

4,238,192

 

4,260,340

 

Mastiff

 

 

7,487,914

 

Other

 

 

1,075,957

 

 

 

 

 

 

 

Total Deferred Revenue

 

$

52,303,293

 

$

12,824,211

 

 

These performance based payments received from the U.S. government are recorded by the Company as deferred revenue since they represent moneys that the Company expects will ultimately be recognized as revenues after the Company has manufactured and the customer has accepted delivery of the vehicles.

 

NOTE 18—SUBSEQUENT EVENTS

 

On October 8, 2007, the Company was awarded a contract with an estimated value of approximately $3.5 million from BAE Systems for the supply of labor and for the fabrication and final integration of forty-five (45) Iraq Light Armored Vehicles (“ILAV”). Under this contract, BAE Systems will provide all material and will be responsible for the automotive integration.

 

On October 15, 2007, the Company filed amendments to its Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Annual Report”) and Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006

 

22



 

Annual Report”). The 2005 and 2006 annual reports were amended to reflect, among other things, the conclusion of the Company’s management that the Company’s internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2005 and 2006 because of certain material weaknesses in its internal control over financial reporting. In both the 2005 Annual Report and 2006 Annual Report, the Company disclosed the control deficiencies that contributed to the Company’s material weaknesses,  including its lack of a sufficient complement of personnel with an appropriate level of accounting knowledge, experience with the Company, and training in the application of GAAP commensurate with the Company’s financial reporting requirements. For additional information, see the amendments to the Company’s 2005 and 2006 Annual Reports filed on Form 10-K/A with the SEC on October 15, 2007.

 

On October 18, 2007, the Company was awarded a delivery order by the U.S. Marine Corps for 553 Cougar Category I and 247 Cougar Category II MRAP vehicles, with an estimated value of approximately $376 million. Approximately fifty percent of the work under this contract will be performed by GDLS, pursuant to our joint venture agreement with GDLS. The award was made pursuant to a letter contract between the Company and the U.S. Marine Corps dated January 25, 2007 and pertains to the testing, production, and sustainability for its MRAP vehicle program.

 

On November 5, 2007, the Company was awarded a contract from the U.S. Marine Corps for the purchase of services in support of operation of the Mine Resistant Ambush Protected (MRAP) Vehicles University, which is an MRAP training program at Red River Army Depot, integrated logistics support, and field service representative support. Total approximate value of the contract is approximately $83.6 million. Approximately fifty percent of the work under this contract will be performed by GDLS, pursuant to the Company’s joint venture agreement with GDLS.

 

On November 8, 2007, the Company was awarded a contract from the U.S. Army’s Tank Automotive and Armaments Command, or TACOM, for the production of an additional 29 Buffalo mine-protected vehicles. The approximate total value of the contract is $22.3 million.

 

23



 

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

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to help the reader understand the results of operations and financial condition of Force Protection, Inc. and its subsidiaries for the three and nine months ended September 30, 2007. The unaudited statements and other financial information as of and for the three and nine months ended September 30, 2006 and 2007 and the following MD&A discussion should be read in conjunction with the Company’s 2006 annual report, including the audited financial statements, for the year ended December 31, 2006, originally filed March 16, 2007, as amended by the Company’s Annual Report on Form 10-K/A filed with the SEC on June 11, 2007, July 12, 2007 and October 15, 2007.

 

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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact included in this 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 including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward–looking statements include, among other things:

 

                  statements regarding the growth in the world market for mine–protected vehicles;

 

                  the pace at which the U.S. may seek to increase the armor and blast protection of its military vehicles;

 

                  quantities of vehicles that may be purchased or ordered by various customers;

 

                  statements regarding the U.S. military’s plans or intentions to replace the Humvee fleet with armored vehicles, including the possible timeframe of this replacement and the potential number of armored vehicles that might be required under this program;

 

                  information regarding the number of various types of MRAP and other armored vehicles that may be purchased by the U.S. Marine Corps, the U.S. Army and other U.S. and foreign customers under various programs, including the MRAP, GSTAMIDS and JERRV programs, and the value of vehicles that may be acquired;

 

                  statements with respect to our expectations regarding our ability to obtain materials, components and supplies necessary to manufacture our vehicles, our ability to improve cost efficiencies, including, without limitation, as a result of volume purchasing, improvements in our manufacturing process and possible future changes in the efficiencies in our operations;

 

                  statements regarding the future market for our vehicles and other blast protected vehicles;

 

                  statements regarding any changes in our cost of sales or our general and administrative expenses as a percentage of gross revenue or gross sales;

 

                  statements regarding our future expenses to expand our infrastructure, future capital expenditures, future cash flow, future liquidity and future vehicle production and whether cash flows will be sufficient to satisfy our cash requirements;

 

24



 

                  statements regarding the revenues that may be derived from, and the quantities of vehicles 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;

 

                  statements regarding our ability to utilize net operating loss carry-forwards for income tax purposes;

 

                  statements regarding our backlog and the estimated value of any U.S. military and other governmental contracts;

 

                  statements regarding the rate at which we and GDLS will produce MRAP vehicles and the date as of which we will achieve any particular monthly production rate of these vehicles;

 

                  the number of MRAP vehicles that will be required by the Department of Defense and the value of those vehicles;

 

                  statements regarding the capabilities, relative performance or advanced nature of our engineering or the technology included in our vehicles or their various features or our production processes; and

 

                  statements regarding our future business plans and strategies, including with respect to expanding our product line, our research and development efforts, strategic alliances with industry partners, our marketing efforts and changes in our revenue mix and the portion of our revenue generated by the sale of spare parts.

 

Since our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events or circumstances anticipated by these forward-looking statements will occur or, if any of them do, what impact they will have on our business, results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update these forward-looking statements to reflect new information, future events or otherwise.

 

These forward-looking statements are based on current expectations about future events and are subject to numerous uncertainties and factors, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Form 10-Q, including the risks outlined under “Risk Factors,” will be important in determining future results. We do not know whether the expectations reflected in these forward-looking statements will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described under “Risk Factors.”

 

ACCOUNTING RESTATMENT AND  MATERIAL WEAKNESSES

 

On June 27, 2007, we filed an amendment to our Annual Report on Form 10-K for the year ended December 31, 2005 to amend and restate our financial statements and other information for the years 2005, 2004 and 2003. On June 11, 2007 and on July 12, 2007, we filed amendments to our Annual Report on Form 10-K for the year ended December 31, 2006 to amend and restate our financial statements and other information for the years ended December 31, 2005 and 2004. The restatements adjusted our accounting for preferred stock and warrants issued to investors, accounting for stock-based compensation to employees and non-employees and accounting for rent expense on a straight-line basis and also restated earnings per share of common stock to give effect to accretion related to preferred stock and to give effect to common shares issued upon conversion of preferred stock. The financial information included in this report for the years ended December 31, 2005 and 2004 reflects these restatements. For additional information, see “Risk Factors” and note 1 to our consolidated financial statements included elsewhere herein.

 

The items identified by us relate to the valuation method used to account for certain equity issuances which did not properly include a full analysis of the embedded conversion feature associated with such issuances as required under EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable

 

25



 

Conversion Ratios, or which were otherwise incorrectly valued. As a result, a number of shares of our stock issued as compensation to certain executives and other third parties and recorded as general and administrative compensation expense appear to have been valued at less than fair value.

 

We believe that this issue is limited to a small number of equity issuances made during 2003, 2004 and 2005, with a total combined value of not more than an additional cumulative net loss of approximately $3.75 million for the years 2003 and 2004, and an approximate realized gain in the range of $2 to $4 million in 2005. Our management and audit committee have discussed the subject matter giving rise to this conclusion with Jaspers + Hall, PC, our independent accounting firm for the fiscal years ended December 31, 2005 and 2006.

 

We subsequently concluded that, as a result of the foregoing matters, there were material weaknesses in our internal control over financial reporting. Accordingly, on October 15, 2007, we filed a further amendment to our Annual Report on Form 10-K for the year ended December 31, 2006 to reflect management’s reassessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 and management’s conclusion that our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2006 because of these material weaknesses. Management’s revised assessment is contained, and the material weaknesses are described, in Item 9A of the foregoing amendment to our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on October 15, 2007. On October 15, 2007, we also filed a second amendment to our Annual Report on Form 10-K for the year ended December 31, 2005 to reflect management’s reassessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 and management’s conclusion that our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2005, because of those material weaknesses.

 

The June 11, 2007 and July 12, 2007 amendments to our Annual Report on Form 10-K for the year ended December 31, 2006 also amended certain financial information for the year ended December 31, 2006 to include the effect of the restatement of our 2005 financial statements and the effect on basic earnings per share of accretion on preferred stock and the calculation of weighted average common shares used to compute diluted earnings per share. In addition, on July 19, 2007, we filed an amendment to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 to include the effect of the amended financial statements for the year ended December 31, 2006 and to restate certain financial information in that Quarterly Report for the effects of stock-based compensation to employees and the effect on basic earnings per share of accretion on preferred stock and the calculation of weighted average common shares used to compute diluted earnings per share. For information on the effects of these amendments and restatements on certain of our financial information for the year ended December 31, 2006 and the quarter ended March 31, 2007, see “Notes to Consolidated Financial Statements—Note 1–Basis of Presentation—2006 Year End Amendment and Q1 Restatement” in our Form 10-Q/A for the quarterly period ended March 31, 2007 filed with the SEC on July 19, 2007.

 

For information on the effects of these amendments and restatements on certain financial information for the three and nine months ended September 30, 2006, see Note 1 of our consolidated financial statements included elsewhere herein.

 

Certain Matters that may affect our Results of Operations

 

As described below under “Risk Factors,” the primary uncertainty about our future operations is whether or not we will continue to receive additional orders and contracts for our vehicles. It is impossible to predict with certainty whether we will receive any such future orders or contracts from existing or new customers. If we do not receive future orders and contracts, our business, prospects, financial conditions and operating results would be seriously harmed and it is unlikely that our business will continue. In particular, we continue to rely on the U.S. Army and the U.S. Marine Corps for substantially all of our net sales, and if either customer ceases to issue further orders or contracts to us or significantly

 

26



 

decreases its orders or contracts, our business may fail. Likewise, increases or decreases in the number of vehicles ordered will cause our operating results to fluctuate, perhaps substantially.

 

Our operating results are also subject to fluctuations as a result of the government contracting process, including the right of the U.S. government to delay or withhold certain payments and the “definitization” process described under “Allowance of Contractual Adjustments - Definitization” in  note 2 to our consolidated financial statements included elsewhere herein. Likewise, our allowance for contracts undergoing definitization is an estimate based on our limited operating history, and our results of operation may be materially adversely affected if these estimates are incorrect.

 

As discussed under “Risk Factors” in Part II, Item 1A of this report, we have in the past been awarded single source contracts by the U.S. military, meaning that our competitors were not entitled to bid for these contracts. However, a recent report of the Inspector General of the U.S. Department of Defense has recommended, among other things, that future contracts be subject to competitive bidding. Many of our competitors have substantially greater financial and other resources than we do, and there can be no assurance that we will be successful in winning new contracts or orders that are subject to competitive bidding, which would adversely affect our results of operations.

 

As discussed  under “Risk Factors” in Part II, Item 1A of this report, our accounting and financial systems do not currently meet DCAA standards. Efforts to remediate these material weaknesses and bring our financial and accounting systems into compliance with DCAA standards will be ongoing, and have resulted and are expected to continue to result in substantial additional costs even after such time as our accounting and financial systems are brought into compliance with DCAA standards. Any failure to comply with these DCAA standards could have a material adverse affect on our business.

 

We experienced substantial growth in net sales during fiscal year 2006 and the first nine months of 2007. As a result, our general and administrative expenses and certain of our other expenses increased substantially as well. We expect that general and administrative expenses and certain other expenses will continue to increase. However, we are unable to predict whether general and administrative expenses, cost of sales and other expenses, expressed as a percentage of our net sales, will increase or decrease.

 

We may encounter some difficulties in securing the necessary components for our vehicles, including steel, truck chassis, axle sets and ballistic glass. Delays in obtaining required components and raw materials, or increased costs of those components and raw materials, could negatively impact our financial performance and liquidity. To the extent that the cost of these or other components or raw materials increase further, our results of operations may be adversely affected, perhaps substantially. In that regard, a substantial portion of our current contracts are fixed-price contracts where we do not have any ability (or, in certain cases, have only a limited ability) to pass on increased costs of components or raw materials to the customer.

 

Our results of operations for the nine months ended September 30, 2007 reflect costs associated with our continued growth, as we expand our manufacturing facilities and capabilities. This includes substantial vehicle and automotive engineering work, manufacturing engineering development, hiring and training work force and the expansion of our manufacturing, warehousing and administrative facilities, including the new facility where we intend to produce our Cheetah vehicle. We continue to face challenges of expanding our managerial capacity, which is required and continues to require significant capital and significant commitment of our managerial and other resources. To the extent that these expenditures do not result in substantially increased net sales, our results of operations and liquidity will suffer. In particular, we have made and will continue to make substantial expenditures to equip a new facility to produce our Cheetah vehicle. We have not sold nor do we have any orders for Cheetah vehicles. If we do not receive orders for our Cheetah vehicle in the amount we anticipate or at all, or if those orders are delayed, our operating results and financial condition will be materially adversely affected. See “Risk Factors” in Part II, Item 1A of this report or if we are unable to achieve anticipated production abilities in manufacturing the Cheetah at this new facility.

 

27



 

Matters relating to our Joint Venture with GDLS

 

As described below, we have entered into a joint venture with GDLS for the production of our Cougar vehicle for the MRAP Category I and Category II program requirements. Our ability to successfully deliver vehicles and obtain additional orders under this program is critical to our success, and any failure to do so would have a material adverse effect on us. As of September 30, 2007, Category I and Category II vehicles order under this program accounted for approximately 96.7% of our backlog.

 

We and GDLS are each expected to handle 50% of the manufacturing and other work requirements under these programs (with the division of work to be based on revenues rather than number of vehicles), although the joint venture agreement indicates that work may not be allocated 50%-50% initially. However, because our MRAP contract with the U.S. Marine Corps was awarded to the Company and has not yet been novated to the joint venture, 100% of the revenues from the this contract (including revenue from vehicles manufactured by GDLS) have been included as net sales in our financial statements and will continue to be included until such time as the MRAP contract is novated to the joint venture, at which point we will recognize revenues only from vehicles subcontracted by the joint venture that we actually manufacture. Per the current subcontract agreement with GDLS, included in the Company cost of sales (and until the MRAP contract is novated will continue to include) is an amount equal to 100% of revenues from vehicles manufactured by GDLS.

 

So long as we continue to include 100% of the revenues from vehicles manufactured by GDLS as net sales and an amount equal to 100% of those revenues as cost of sales in our financial statements, it is expected to cause our cost of sales, expressed as a percentage of our net sales, to increase, and we expect that this increase will be greater if and to the extent that revenue from vehicles sold by the Company but manufactured by GDLS through the joint venture increase (although, as noted above, this adverse effect will cease at such time as the relevant contracts are novated to the joint venture and thereafter our cost of sales and net sales will no longer reflect revenues from vehicles manufactured by GDLS). Notwithstanding the foregoing accounting treatment, we have not retained any of the proceeds from the sale of vehicles manufactured by GDLS under the joint venture agreement.

 

For the nine months ended September 30, 2007, the adverse impact described in the preceding paragraph was limited, as our net sales included only approximately $33.3 million attributable to vehicles manufactured and sold by GDLS pursuant to the joint venture, compared to our total net sales of $441.2 million for that period. However, we expect that revenues from the MRAP contract will increase substantially in the fourth quarter of 2007 and, as a result, the adverse impact on cost of sales as a percentage of net sales is expected to increase, perhaps substantially. If and to the extent that revenues from the joint venture increase, then, until the MRAP contract is novated to the joint venture, we expect that our cost of sales as a percentage of net sales will continue to increase.

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

 

Management’s discussion and analysis of  financial condition and results of operations is based on the Company’s unaudited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to long-term contracts and programs, claims for unanticipated contract costs, goodwill and other intangible assets, income taxes, worker’s compensation, warranty obligations, and contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are

 

28



 

not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. There were no significant changes in the Company’s critical accounting policies during the first nine months of 2007

 

Dividend Policy: We have never declared or paid a cash dividend on our common stock. We currently intend to retain all of our available funds for use in our business and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements, restrictions contained in our agreements and other factors which our board of directors deems relevant.

 

Off-Balance Sheet Arrangements: As of September 30, 2007, other than operating leases, the Company had no material off-balance sheet financing arrangements.

 

Force Dynamics Joint Venture Agreement:    On December 15, 2006, the Company entered into a joint venture agreement, referred to as the Agreement with General Dynamics Land Systems Inc., GDLS, pursuant to which a Delaware limited liability company named Force Dynamics LLC was formed. The Company agreed to work with GDLS to pursue and execute a contract for the Mine Resistant Ambush Protected, or MRAP, Vehicle Program. Under the Agreement, the MRAP Program is defined to include any and all solicitations and requests for proposals for MRAP production and lifecycle support and/or any follow-on work that may be performed related to the MRAP  vehicles. However, the Agreement provides that the scope of work to be undertaken by the joint venture is limited to the use of the Company’s Cougar 4-wheeled and 6-wheeled armored vehicles for the MRAP Category I and Category II requirements and does not include any other existing or future contracts or programs for any of the Company’s or GDLS’ other vehicles.  The joint venture was amended on March 28, 2007 to include bids for awards under the Medium Mine Protective Vehicle, or MMPV, Program.  The joint venture submitted a proposal for awards under the MMPV Program.  On October 23, 2007, the joint venture was notified that its proposal would not be accepted and it would not receive awards under the MMPV program as a result of the proposal’s noncompliance to the solicitation.

 

The board of the joint venture is comprised of three designees from the Company and three designees from GDLS. The board of the joint venture has the authority to execute documents in accordance with the terms of the Agreement. Decisions of the joint venture’s board shall be made by majority vote. It is contemplated that the Company and GDLS will each handle 50% of the manufacturing and other work requirements under the joint venture (with the divisional work to be based on revenues rather than number of vehicles), although the Agreement indicates that the work may not be allocated 50% - 50% initially. Both the Company and GDLS are expected to contribute administrative resources equally to the joint venture. It is expected that, where practicable, Force Dynamics LLC will act as the prime contractor for joint venture work, and the Company, along with GDLS, shall act as the exclusive subcontractors.

 

We are currently seeking to have our MRAP contract with the U.S. Marine Corps assigned or “novated from” Force Protection, Inc. to Force Dynamics LLC, the joint venture. Because this contract was awarded to the Company and has not yet been novated to the joint venture, 100% of the revenues from the MRAP contract (including revenue from vehicles manufactured by GDLS) have been included as net sales in our financial statements and will continue to be included until such time as the MRAP contract is novated to the joint venture, at which point we will recognize revenues only from vehicles subcontracted by the joint venture that we actually manufacture. Per the current subcontract agreement with GDLS, included in the Company cost of sales  (and until the MRAP contract is novated will continue to include) is an amount equal to 100% of revenues from vehicles manufactured by GDLS. The impact is more fully discussed under Results of Operations, below.

 

RESULTS OF OPERATIONS—THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED WITH THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006.

 

NON-GAAP FINANCIAL MEASURES

 

The following financial tables and all related discussion contain certain non-GAAP financial measures as defined under SEC rules, such as adjusted net sales and as adjusted gross profit for the three and nine months ended September 30,

 

29



 

2007. These amounts have been adjusted from GAAP measures to exclude amounts related to the Force Dynamics LLC joint venture agreement between General Dynamics Land Systems, Inc., or GDLS, and the Company.

 

The initial MRAP contract awarded to the Company, subject to the joint venture agreement, has not been novated from the Company to Force Dynamics LLC as of September 30, 2007. Therefore the Company is responsible for and required to account for and report all revenues and related costs associated with this contracts. This accounting has no effect on overall net income of the Company but grosses up net sales and costs of goods sold as a result of GDLS’ participation in the work orders for the MRAP contract. The Company has provided reconciliations of these measures to the GAAP measures which are also included in the consolidated statement of operations table, as presented below. The Company believes that the disclosed non-GAAP financial measures improves the transparency of the Company’s financial reporting and provides a more meaningful analysis of these measures and their reporting if and when novation of the contracts from Force Protection, Inc. to Force Dynamics LLC is accomplished.

 

Financial Condition and Results of Operations

 

Overview. For the quarter ended September 30, 2007, we generated net earnings after taxes of $11,361,571. Net sales for this period were $206,291,488 as reported and $173,021,504 as adjusted (excluding vehicles delivered by GDLS, pursuant to the joint venture), against which we incurred total cost of goods of $165,678,182 as reported and $132,408,198 as adjusted (also excluding vehicles delivered by GDLS) resulting in a gross profit of $40,613,306, or 23.5% as adjusted. We incurred general and administrative expenses of $20,029,739 which includes a charge of $830,365 for liquidated damages resulting from our suspension of the availability of a registration statement that we were required to file and keep effective with the SEC to register shares of common stock that we issued in a private placement in December 2006. We incurred research and development expenses in the amount of $2,526,305  resulting in an operating profit of $18,057,262. During this three month period, we delivered a total of 312 vehicles consisting of 21 Buffalo and 291 Cougars (all variants) (excluding vehicles delivered by GDLS).

 

The following table sets forth our unaudited summary consolidated statements of operations data for the three month and nine month periods ended September 30, 2007 and 2006. The only as adjusted data referred to in the following table is net sales and cost of sales. The figures contained in the “% Change” column reflect the “2007 as Adjusted” data as a percentage of the “2006 as Reported” data. Please refer to note (1) below. The discussion and analysis that follows should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

 

 

 

For the three months ended September 30,

 

 

 

(unaudited)

 

 

 

2007 as 
Reported

 

Less Vehicles
Delivered by
GDLS

 

2007 as
Adjusted (1)

 

2006 as Reported

 

Difference(1)

 

%
Change(1)

 

 

 

 

 

 

 

 

 

(Restated)

 

 

 

 

 

Net Sales

 

$

206,291,488

 

$

(33,269,984

)

$

173,021,504

 

$

42,160,858

 

$

130,860,646

 

310

 

Cost of sales

 

165,678,182

 

(33,269,984

)

132,408,198

 

34,242,350

 

98,165,848

 

287

 

Gross profit

 

40,613,306

 

 

40,613,306

 

7,918,508

 

32,694,798

 

413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expense

 

20,029,739

 

 

 

20,029,739

 

6,715,419

 

13,314,320

 

198

 

Research and development expense

 

2,526,305

 

 

 

2,526,305

 

545,717

 

1,980,588

 

363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

18,057,262

 

 

 

18,057,262

 

657,372

 

17,399,890

 

N/M

 

Other income

 

594,143

 

 

 

594,143

 

121,041

 

473,102

 

391

 

Interest expense

 

(61,979

)

 

 

(61,979

)

(110,493

)

48,514

 

(44

)

Net earnings/(loss) before tax

 

18,589,426

 

 

 

18,589,426

 

667,920

 

17,921,506

 

N/M

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax expense

 

7,227,855

 

 

 

7,227,855

 

 

7,227,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings/(loss) after tax

 

$

11,361,571

 

 

 

$

11,361,571

 

$

667,920

 

$

10,693,651

 

N/M

 

Series D convertible preferred stock dividends and accretion

 

 

 

 

 

427,977

 

(427,977

)

100

 

Net earning available to common shareholders

 

$

11,361,571

 

 

 

$

11,361,571

 

$

239,943

 

$

11,121,628

 

N/M

 

 

N/M:  not meaningful

 

30



 

 

 

For the nine months ended September 30,

 

 

 

(unaudited)

 

 

 

2007 as
Reported

 

Less Vehicles
Delivered by GDLS

 

2007 as
Adjusted (1)

 

2006 as
Reported

 

Difference (1)

 

%
Change(1)

 

 

 

 

 

 

 

 

 

(Restated)

 

 

 

 

 

Net Sales

 

$

441,151,894

 

$

(33,269,984

)

$

407,881,910

 

$

133,037,980

 

$

274,843,930

 

207

 

Cost of sales

 

345,252,174

 

(33,269,984

)

311,982,190

 

108,324,917

 

203,657,273

 

188

 

Gross profit

 

95,899,720

 

 

95,899,720

 

24,713,063

 

71,186,657

 

288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expense

 

50,642,242

 

 

 

50,642,242

 

20,421,207

 

30,221,035

 

148

 

Research and development expense

 

10,673,638

 

 

 

10,673,638

 

1,850,522

 

8,823,116

 

477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

34,583,840

 

 

 

34,583,840

 

2,441,334

 

32,142,506

 

N/M

 

Other income

 

3,488,660

 

 

 

3,488,660

 

168,963

 

3,319,697

 

N/M

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(141,570

)

 

 

(141,570

)

(1,736,802

)

1,595,232

 

(92

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings/(loss) before tax

 

37,930,930

 

 

 

37,930,930

 

873,495

 

37,057,435

 

N/M

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax expense

 

14,413,753

 

 

 

14,413,753

 

 

14,413,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings/(loss) after tax

 

$

23,517,177

 

 

 

$

23,517,177

 

$

873,495

 

$

22,643,682

 

N/M

 

Series D preferred convertible stock dividends and accretion

 

 

 

 

 

1,622,819

 

(1,622,819

)

100

 

Net earning available to common shareholders

 

$

23,517,177

 

 

 

$

23,517,177

 

$

(749,324

)

$

24,266,501

 

N/M

 

 

N/M:  not meaningful

 


(1): The Company management’s uses the financial measures “2007 as Adjusted” and “Difference” to supplement its consolidated financial statements, which are presented in accordance with accounting principles generally accepted in the United States, or GAAP. The figures contained in the “2007 as adjusted” and “Difference” columns are not presented in accordance with GAAP as these contracts do not include the number of vehicles delivered by GDLS pursuant to the joint venture agreement with GDLS. The figures contained in the “% Change” column reflect the “2007 as Adjusted” data as a percentage of the “2006 as Reported” data. As required by GAAP, the Company records in its consolidated financial statements all of vehicles delivered pursuant to its joint venture agreement with GDLS, including the vehicles delivered by GDLS. The initial MRAP contract awarded to the Company, subject to the joint venture agreement, has not been novated from the Company to Force Dynamics LLC as of September 30, 2007. Therefore the Company is responsible for and required to account for and report all revenues and related costs

 

31



 

associated with those contracts. This accounting has no effect on overall net income of the Company but grosses up net sales and costs of goods sold as a result of GDLS’ participation through these work orders. The Company has provided reconciliations of these measures to the GAAP measures which are also included in the consolidated statement of operations, as presented above. The Company’s management believes that the disclosed non-GAAP financial measures improves the transparency of the Company’s financial reporting and provides a more meaningful analysis of these measures and their reporting if and when novation of the contracts from Force Protection, Inc. to Force Dynamics LLC is accomplished. The presentation of non-GAAP “2007 as Adjusted” and “Difference” figures are not meant to be a substitute for “2007 as Reported” and “2006 as Reported” presented in accordance with GAAP, but rather should be evaluated in conjunction with the “2007 as Reported” and “2006 as Reported” numbers  The Company’s definition of “2007 as Adjusted” and/or “Difference” may differ from similar measures used by other companies and may differ from period to period.