Valentec Systems 10QSB 2005 Q3 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2005

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 No. 811-08469

ACORN HOLDING CORP.

(Exact name of small business issuer as specified in its charter)

Delaware	59-2332857
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

2629 York Avenue, Minden, LA 71055
(Address of principal executive offices)	(Zip code)
Issuer’s telephone number, including area code	(318) 382-4574

N/A

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

     Yeso Noþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ

APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: shares of common stock, $.01 par value, as of February 9, 2006: 6,997,072

Transitional Small Business Disclosure Format (Check One):

     Yeso Noþ

ACORN HOLDING CORP.
FORM 10-QSB
INDEX

Part I Financial Information
Item 1. Financial Statements	1
Item 2: Management’s Discussion And Analysis Or Plan Of Operation	9
Item 3. Controls And Procedures	18
Part II Other Information
Item 1: Legal Proceedings	19
Item 2: Unregistered Sales Of Equity Securities And Use Of Proceeds	19
Item 3: Defaults Upon Senior Securities	19
Item 4: Submission Of Matters To A Vote Of The Security Holders	19
Item 5: Other Information	20
Item 6: Exhibits And Reports On Form 8-K	20
Signatures	21
Exhibit 31.1	31.1-1
Exhibit 31.2	31.2-1
Exhibit 32.1	32.1-1
Exhibit 32.2	32.2-1
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. It is suggested that the following consolidated financial statements be read in conjunction with the year-end consolidated financial statements and notes thereto included in our Annual Report on Form 10-KSB for the year ended December 31, 2004. Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that can be expected for the year ending December 31, 2005 or for any other period.

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ACORN HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)

	September 30, 2005			December 31, 2004
Current Assets
Cash & Cash Equivalents		1,117,185			1,589,665
Accounts Receivable		7,950,986			1,821,546
Inventory		1,611,953			1,058,265
Contract Development		2,261,533			6,261,978
Other		146,579			91,132
Total Current		13,088,236			10,822,586
Fixed Assets
Furniture, Fixtures		470,709			368,412
Machinery & Equipment		2,246,049			2,005,506
		2,716,758			2,373,918
Less Accumulated Depreciation		(1,331,611	)		(1,053,380	)
Total Fixed		1,385,147			1,320,538
TOTAL ASSETS		14,473,383			12,143,124
Current Liabilities
Accounts Payable		2,397,890			1,515,372
Accrued Expense		529,567			457,012
Customer Deposits		76,056			—
Lines of Credit — Notes Payable		6,998,981			2,255,545
Due to Shareholders		933,455			2,260,604
Deferred Revenue		—			2,453,787
Total Current		10,935,949			8,942,320
TOTAL LIABILITIES		10,935,949			8,942,320
Shareholders Equity
Common stock, $0.01 par value, 20,000,000 shares authorized, 1,573,900 (2004) 100 (2005) issued and outstanding		69,971			10
Additional Paid In Capital		2,922,288			2,992,259
Retained Earnings		545,165			208,535
Total Equity		3,537,434			3,200,804
TOTAL LIABILITIES & EQUITY		14,473,383			12,143,124

See accompanying notes to unaudited consolidated financial statements.

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ACORN HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)

	Nine Months Ended
	September 30,
	2005			2004
Revenues		12,385,602			4,044,427
Direct Contract Cost
Direct Labor		1,136,180			894,541
Direct Materials		4,181,076			1,269,547
Other Direct		2,064,165			1,539,952
Total Direct Cost		7,381,421			3,702,040
Gross Margin		5,004,181			342,387
Indirect Cost
Indirect Expenses		825,493			324,372
Overhead Expenses		721,919			1,426,215
Depreciation / Amortization		701,664			277,779
S G&A Expense		1,869,691			1,901,238
Total Indirect costs		4,118,767			3,929,604
Income from Operation		885,414			(3,587,217	)
Other (Expense) Income
Interest Income		27,569			2,327
Interest Expense		(201,924	)		(58,501	)
Miscellaneous		(20,340	)		26,203
Total Other		(194,695	)		(29,971	)
Income Before Taxes		690,719			(3,617,188	)
Provision for Taxes		—			(9,458	)
Net Income		690,719			(3,607,730	)
Profit (loss) Per Share		0.0987			(36,077.3	)
Weighted Average Shares		6,997,072			100

See accompanying notes to unaudited consolidated financial statements.

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CONSOIDATED ACORN HOLDING
STATEMENT OF STOCKHOLDERS’ EQUITY
PERIOD ENDING SEPTEMBER 30, 2005
(Unaudited)

			Additional
	Common		Paid-In			Retained
	Stock		Capital			Earnings			Total
Valentec Balance 12/31/04		10		3,484,773			316,021			3,800,804
Net Income		—		—			690,719			690,719
Re-class Add Paid In Cap				(600,000	)					(600,000	)
Distribution to Parent							(354,089	)		(354,089	)
Valentec 9/30/05		10		2,884,773			652,651			3,537,434
Consolidation
Re-class Add Paid In Cap				(354,089	)					—
Distribution to Parent				354,089						—
Acorn Stock at Par		69,971								69,971
Re-class Add Paid In Cap				(69,971	)					(69,971	)
Consolidated 09/30/05		69,971		2,814,812			652,651			3,537,434

See accompanying notes to unaudited consolidated financial statements.

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ACORN HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)

	Nine months ended			Nine months ended
	September 30, 2005			September 30, 2004
Cash from Operations
Net Income		690,719			(3,605,242	)
Depreciation / Amortization		701,664			275,291
Net From Operations		1,392,383			(3,329,951	)
(Increase) Decrease in Assets
Accounts Receivable		(6,129,440	)		613,581
Inventory		(553,688	)		(1,389,390	)
Contract Development		1,327,468			1,468,391
Income Tax Rec		(1,207,905	)		—
Other assets		(5,079	)		—
Pre Paid Expenses		(55,447	)		(444	)
Total		(6,624,091	)		(692,138	)
Increase (Decrease) in Liabilities
Accounts Payable		958,576			(1,061,012	)
Accrued Expense		77,632			942,799
Deferred Revenue		(158,239	)		—
Customer Deposits		2,331,129			59,065
Total		3,209,098			(58,608	)
Net Cash from Operating Activities		(2,022,610	)		(2,696,421	)
Cash Flow from Investing Activities
Furniture, Fixtures & Leasehold Improvements Machinery & Equipment		(342,840	)		(176,241	)
Additional Paid In Capital		—			71,246
Distribution to Parent		(354,089	)		—
		(696,929	)		(104,995	)
Cash Flow from Financing Activities
Lines of Credit — Notes Payable		4,743,436			1,120,770
Additional Paid In Capital		(100,000	)
Notes Payable		100,000			—
Due to Shareholders		(1,168,909	)		1,780,966
		3,574,527			2,901,736
Net Increase (decrease) in Cash		854,988			100,320
Cash Beginning of Year		262,197			152,767
Cash End of Year		1,117,185			253,087

See accompanying notes to unaudited consolidated financial statements.

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NOTE 1ORGANIZATION AND PURPOSE

Acorn Holding Corp. (the “Company”) was incorporated under the laws of the State of Delaware on September 8, 1983. Pursuant to the terms of an Assignment and Assumption Agreement (the “Assignment Agreement”), dated as of September 6, 2005, the Company has assumed all of the rights and obligations of Valentec Systems, Inc. (“Valentec”), the Company’s new wholly-owned subsidiary under that certain Promissory Note in the principal amount of $1,000,000 issued by Valentec on April 28, 2005 in favor of Montgomery Equity Partners, Ltd (the “Note”), and the Standby Equity Distribution Agreement, dated April 28, 2005, by and between Cornell Capital Partners, LP (the “SEDA”), together with the related agreements and documents.

The foregoing summary of the terms and conditions of the Assignment Agreement, the Note, the SEDA and the related agreements and documents do not purport to be complete and are qualified in their entirety by reference to the full text of the agreements which are filed as exhibits hereof and are hereby incorporated herein by reference.

On September 6, 2005, the transactions contemplated under the Stock Purchase and Share Exchange Agreement (the “Purchase Agreement”), dated May 27, 2005, by and among the Company, Valentec and the two stockholders of Valentec (the “Valentec Stockholders”) were consummated. Pursuant to the terms of the Purchase Agreement, the Company purchased all of the outstanding shares of common stock of Valentec (i.e., 100 shares) in exchange for the issuance by the Company to the Valentec Stockholders on a pro rata basis of 5,423,130 newly-issued shares of the Company’s common stock, par value $.01 per share (the “Common Stock”). The shares of Common Stock are restricted securities that are exempt from the registration requirements of the Securities Act of 1933, as amended, in reliance on the exemption provided by Rule 506 of Regulation D. Following the consummation of such transactions, the Valentec Stockholders, on an aggregate basis, own approximately 77.47% of the issued and outstanding Common Stock of the Company.

Pursuant to the terms of the Purchase Agreement, five of the six members of the board of directors of the Company, namely Paula Berliner, George Farley, Ronald J. Manganiello, Stephen A. Ollendorff and Bert Sager, resigned effective as of June 6, 2005. In addition, Edward N. Epstein resigned as the Company’s Chief Executive Officer and Larry V. Unterbrink resigned as the Company’s Secretary and Treasurer effective as of June 6, 2005. Mr. Epstein is the sole remaining member of the Company’s board of directors. Effective as of June 6, 2005, Mr. Zummo was appointed President and Chief Executive Officer of the Company. Since 2000, Mr. Zummo has been Chairman of the Board, President and Chief Executive Officer of Valentec.

NOTE 2BASIS OF PRESENTATION

The consolidated Interim financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the financial position and results for the periods. These interim financial statements conform to the requirements for interim financial statements and consequently do not include all the disclosures normally required by accounting principles generally accepted in the United States. The results for the nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year. Reporting developments have been updated where appropriate.

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NOTE 3ACCOUNTING POLICIES

(A) Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required 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 and revenues and expenses during the reported period. Actual results could differ from those estimates.

(B) Loss per Share

Basic and diluted net profit or loss per common share is computed based upon the weighted average common shares outstanding as defined by Financial Accounting Standards No. 128, “Earnings Per Share.” As of September 30, 2005 and 2004, there were no common share equivalents outstanding.

(C) Income Taxes

The Company accounts for income taxes under the Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(D) Concentration of Credit Risk

The Company at times has cash in banks in excess of FDIC insurance limits and places its temporary cash investments with high credit quality financial institutions. At September 30, 2005, the Company had approximately $1,559,000 in cash balances at financial institutions, which were in excess of the FDIC insured limits.

(E) Business Segments

	Nine months ended
Revenues by Segment	September 30, 2005
Systems/Management Systems/Integration	$	5,489,701
Energetic Manufacturing	$	5,849,049
Metal Parts	$	501,550
Other	$	545,302
Total	$	12,385,602

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	Nine months ended
Gross Margin Segment	September 30, 2005
Systems/Management Systems/ Integration	$	1,841,302
Energetic Manufacturing	$	2,612,984
Metal Parts	$	386,335
Other	$	163,560
Total	$	5,004,181

	Nine months ended
Order Backlog by Segment	September 30, 2005
Systems Management Systems Integration	$	30,873,580
Energetic Manufacturing	$	2,969,624
Metal Parts Manufacturing	$	1,467,500
Total	$	35,310,704

* Prior to the acquisition of Valentec Systems, the Company operated as one segment therefore segment information for 2004 is not available.

(G) Recent Accounting Pronouncements

Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4”“ SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions — an amendment of FASB Statements No. 66 and 67,” SFAS No. 153, “Exchanges of Non-monetary Assets – an amendment of APB Opinion No. 29,” and SFAS No. 123 (revised 2004), “Share-Based Payment,” were recently issued. SFAS No. 151, 152, 153 and 123 (revised 2004) have no current applicability to the Company and have no effect on the financial statements.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Entities”, (FIN No. 46) an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk and loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s

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residual returns or both. FIN No. 46 requires disclosures about variable interest entities that companies are not required to consolidate but which the company has a significant variable interest. The consolidation requirements will apply immediately for newly formed variable interest entities created after January 31, 2003 and entities established prior to January 31, 2003, in the first fiscal year or interim period beginning after June 30, 2003. The adoption of FIN No. 46 is not expected to have a material impact on our consolidated results of operations and financial position.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Certain statements in this Form 10-QSB may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management’s expectations with respect to future financial performance and future events, particularly relating to sales of current products. Such statements involve known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which could cause actual results and outcomes to differ materially from those expressed herein. These statements are often, but not always, made typically by use of words or phrases such as “estimate,” “plans,” “projects,” “anticipates,” “continuing,” “ongoing,” “expects,” “believes,” or similar words and phrases. Factors that might affect such forward-looking statements set forth in this Form 10-QSB include, among others: (i) increased competition from new and existing competitors and pricing practices from such competitors and (ii) general industry and economic conditions. Any forward-looking statements included in this Form 10-QSB are made only as of the date hereof, based on information available to the Company as of the date hereof, and subject to applicable law to the Company, the Company assumes no obligation to update any forward-looking statements.

     The Company’s acquisition of Valentec on September 6, 2005 was treated as a reverse acquisition for financial reporting purposes. As such, the Company’s financial statements have been prepared as if Valentec was the acquiror. The results of operations discussed below represent the operations of Valentec through September 30, 2005. The results of operations subsequent to June 6, 2005 reflect the consolidated operations of Valentec and the Company.

     Revenues for the third quarter ended September 30, 2005 came entirely from Valentec as the Company’s only operating subsidiary. Revenues for Valentec showed consistent improvement as Valentec continues to gear up for higher productions levels to cut into its backlog of orders. Valentec spent heavily in prior years to develop the products and equipment necessary to meet customer demands, which is reflected in capitalized development cost.

9

Plan of Operation

     As of December 31, 2003, the Company ceased its prior business operations and became a public shell and remained a public shell until its acquisition of Valentec was completed on June 6, 2005. Thus, from December 31, 2003 until May 2005, the Company had no revenues from operations. The Company plans to make investments in bids and proposal activity that, if successful, will significantly increase backlog, future sales and future profits. Valentec intends to bid on new U.S. Army systems ammunition requirements as well as new energetic and metal component requirements. Valentec also intends to make investments in automation equipment for one energetic production that may improve efficiencies and future profits. The Company is also planning to make certain strategic acquisitions that may increase backlog, sales and future profits.

     The Board of Directors of each of Valentec and Valentec International Limited (“VIL”) have agreed to negotiate toward the acquisition of VIL by Valentec for $6,000,000 pursuant to further terms to be negotiated and included in a definitive agreement between the parties. VIL is a United Kingdom chartered and registered corporation that has been in business since 1978. VIL has been a supplier of conventional ammunition and related defense products to foreign governments.

Results of Operations

     Revenues for the nine months ended September 30, 2005 were $12,385,062 compared to $4,044,427 for the nine months ended September 30, 2004, an increase of 206.2%. Total gross margin for the nine months ended September 30, 2005 was $5,004,181 (or 40.4% of total revenue) compared to $342,387 for the nine months ended September 30, 2004, an increase of 1,361.6%.

     Total direct costs (materials and labor) for the nine months ended September 30, 2005 were $7,381,421 compared to $3,702,040 for the nine months ended September 30, 2004, an increase of 99.4%. Total indirect costs (overhead, general and administrative and depreciation) for the nine months ended September 30, 2005 were $4,118,767 compared to $3,651,825 for the nine months ended September 30, 2004, and increase of 12.8%.

     Other expense (interest income (less interest income) as well as miscellaneous items) were $194,695 for the nine months ended September 30, 2005 compared to $29,971 for the nine months ended September 30, 2004, an increase of 549.6%.

     Net income for the nine months ended September 30, 2005 was $690,719 compared to a net loss of $3,348,868 for the nine months ended September 30, 2004.

Liquidity and Capital Resources

     For the nine months ended September 30, 2005, the Company had negative cash flow from operations of $2,030,284. On September 30, 2005, the Company had outstanding borrowings (non-related party) of approximately $6,998,981. On September 30, 2005, the Company had total assets of approximately $14,473,383. This is an increase from total assets of $12,143,124 on December 31, 2004.

     The Company’s sources and uses of funds were as follows: (1) it used net cash of $568,789 in its operating activities in the nine months ended September 30, 2005; (2) it used cash of $926,018

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in investing activities in the nine months ended September 30, 2005; and (3) it received $3,525,091 from financing activities in the nine months ended September 30, 2005, consisting primarily of the release of restricted cash and proceeds from the line of credit.

     The primary source of financing for the Company since its inception has been through the issuance of common stock and borrowings. The Company had cash and cash equivalents of $1,117,185 as of September 30, 2005 and $1,589,665 as of December 31, 2004. The Company is actively seeking financing alternatives for working capital, product development, marketing, and business opportunities. In this regard, on April 28, 2005, the Company entered into a Standby Equity Distribution Agreement (“SEDA”) with Cornell Capital Partners, L.P. (“Cornell”), whereby it can “put” to Cornell, for cash, up to $15 million in the Company’s common stock over a two-year period of time. The Company believes this equity financing should increase its chances of succeeding in its growth plans. The Company anticipates using the $15 million SEDA to support and fund expenditures for bids and proposals, capital equipment automation and acquisitions, as well as working capital growth. In order to make use of the SEDA, the Company must first increase its authorized capital, become listed on the Over-the-Counter Electronic Bulletin Board (“OTCBB”) and register additional shares for pubic sale. There can be no assurance that the Company will be able to successfully increase its authorized capital, become listed on the OTCBB and register additional shares for public sale. Therefore, the Company continues to explore additional equity and debt financings, vendor-financing programs, letters of credit for manufacturing, leasing arrangements for its products, and equity participation for media purchases that will advertise its products. Also, the Company believes that marketing and consumer awareness is central to generating monthly revenues. The Company believes that its products may have greater appeal to foreign consumers due to quality, performance and price.

     The Company has entered into a Master Factoring Agreement with Rockland Credit Finance as an additional source of financing. A credit line of $7,500,000.00 has been established to provide additional working capital for the rapid growth the Company has experienced. The Company plans to use the additional funding for facilitization and additional equipment needed to support the increased backlog. The Company plans to pay off all other credit lines in the future with current revenue and cash on hand.

Valentec Systems, Inc.

     From January 1998 through January 2005, Valentec’s business involved manufacturing armaments and providing property management services to the United States Army by maintaining the Army’s Louisiana Army Ammunition Plant and recruiting new tenants. This work involved infrastructure maintenance and evaluation of environmental considerations and physical security. However, beginning in 2003, Valentec began devoting significant time and money to realign its business to focus on more profitable business segments such as Systems Management/Systems Integration, Energetic Manufacturing and Metal Parts Manufacturing.

     Valentec’s current business pursuits are categorized into 3 major segments: Systems Management/System Integration, Energetic Manufacturing, and Metal Parts Manufacturing

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Systems Management / Systems Integration

     120MM Mortar Weapon System with Electronic Fire Control — “KESHET”.Valentec was awarded a system contract from Soltam Systems, Inc. for the production and integration of RMS6 120mm Mortar Weapon System for the Israeli Defense Forces using U.S. Foreign Military Financing as described herein on page five. The mortar weapon system will be fitted with Electronic Fire Control System and will be integrated in to M1064A3 Mortar carrier as well as towed platform. Delivery of the Mortar System will begin in calendar year 2006.

     Keshet (Hebrew for bow) 120mm self propelled mortar contains state of the art Command, Control and Communication devices and offers infantry and armor commander unique enhanced operational capabilities. Improvements in inertial navigation systems further enhance the accuracy in target and weapon location and, combined with a more sophisticated laying system, it greatly increases the accuracy of mortar ammunition delivery. The 120mm mortar system offers significant advantages in firepower, area coverage, tactical mobility, flexibility and survivability.

     The program consists of Technology Transfer, Configuration Control, Procurement, Assembly, Integration and Testing of 120MM Mortar Weapon System with electronic Firing Control. A total of 82 complete integrated systems and 12 equivalent spare parts of the system will be delivered under this contract to Israeli Defense Forces for approximately $16,745,000. Valentec is in discussions for future requirements for the Israeli Defense Forces.

     Valentec has placed purchase orders with two forging houses and four other prime vendors for major subcomponents and numerous purchase orders with a host of smaller vendors for the parts necessary to assemble the system. Subcomponent deliveries have been timed to provide an arrival that closely coincides with Valentec’s production schedule, yet leverages quantity and bulk buys.

     Valentec is also responsible for the quality of all components and the reliability of each system. To this end, VSI has tasked their vendors with a variety of tests and procedures intended to verify and validate compliance to specifications, functionality, and reliability. These tests include First Article Tests, fire control calibration tests, and function testing.

     Mortar Ammunition.Valentec was awarded a 2-year systems integration and management contract in early 2005 from Soltam Systems to assemble and deliver mortar ammunition for the Israeli Defense Forces using U.S. Foreign Military Financing as described herein on page five. The mortar ammunition will be provided in 120mm, 81mm, and 60mm rounds with a contract value of approximately $20,000,000. The 120mm and 60mm were ordered with two different explosive fillers each and the 81mm was ordered in a single configuration for a total of five different rounds. Deliveries will begin in early 2006.

     Mortars are used in the infantry or in a mechanized company against troops, light vehicles or similar targets or for incendiary and smoke spotting purposes. When a mortar round is loaded into the mortar firing system, it slides down the tube until a fixed firing pin at the bottom of the barrel ignites the ignition cartridge. The energy from the ignition cartridge ignites the propellant charge. Rapidly expanding gases from the burning propellant accelerates the round and launches it in its ballistic trajectory. The mortar is aerodynamically stabilized in flight by its fins. The fuse is armed after the projectile passes a minimum safe separation distance and, on impacting the ground, the fuse explodes the high explosive charge that shatters the shell body fragments, which are then

12

propelled toward the target. Some mortars are designed to explode at a low height above the ground for maximum lethality.

     Valentec has placed purchase orders with 11 prime vendors for major subcomponents and numerous purchase orders with a host of smaller vendors for the parts necessary to assemble the ammunition. Subcomponent deliveries have been timed to provide an arrival that closely coincides with Valentec’s production schedule, yet leverages quantity and bulk buys.

     In addition to the procurement of necessary sub-components, Valentec is also responsible for the quality of these components and, of course, the quality and reliability of each mortar. To this end, Valentec has tasked their vendors with a variety of tests and procedures intended to verify and validate compliance to specifications, functionality, and reliability. These tests include First Article Tests, weight calibration and verification, and function testing.

     In support of this major production effort, additional manufacturing space was leased and equipped with unique fixtures and tooling. As 120mm, 81mm and 60mm mortar ammunition is not unique to the IDF, the facilitization accomplished by Valentec for this program has positioned them well to compete successfully on future mortar ammunition contracts in domestic and overseas markets.

     In the Systems Management/Systems Integration segment, our sources and availability of raw materials present no unique challenges with the exception of obtaining M8M propellant from BMJ of Herzegovina. This requires import licensing for materials and export licenses for delivery of the complete product to Israel. Also, part of the U.S. State Department process mandates the provision of End User certificates. All of these requirements are known and actions are in process to have the conditions totally resolved. Valentec’s primary suppliers for the Systems Management/Systems Integration projects are:

Ø	BMJ Belgrade, Herzegovina	M8M Propellant
Ø	Accurate Energetics, McCuen, TN	Explosive Loading
Ø	Medico, Wilkes-Barre, PA	Metal Parts
Ø	POCAL	Metal Parts
Ø	Lockheed-Martin, Scranton, PA	Metal Parts
Ø	Greene Tweed, Kulpsville, PA	O-ring & Seals
Ø	Ellwood National Forge, Irvine, PA	Forging
Ø	Rotek, Inc., Aurora, OH	Bearings

Energetic Manufacturing

     Valentec’s energetic work aspect includes various flares and simulators with multiple end uses. The flares can be used for illumination and/or signaling. The simulators are used for training purposes to simulate a battlefield environment. In the flare work, we are a member of a team that in May of 2005 was awarded a planned 5-year procurement of 40MM flares. Valentec’s part of this award is to produce 40MM, M583, White Star Parachute, flares. This opportunity has a potential value of $50 million over 5 years dependent on assigned option quantities. The option year

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quantities are totally dependent on the annual appropriation authorized by the U.S. Congress as supported by the user (Army, Navy, Marines) community.

          There are multiple additional areas/opportunities for pursuit in the pyrotechnic arena. Valentec is actively seeking a government systems procurement solicitation for 105MM illumination product. We have successfully manufactured several test devices, which exhibit illumination significantly greater than specification requirements and burn times that are equally remarkable.

          Energetic Manufacturing requires appropriate licensing by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE) before conducting any energetic operations. All known required applications have been completed and licenses issued. Additionally, a safety site application must be presented to the Defense Contract Management Agency (DCMA) for review and approval, which is complete, and in place. Valentec primary suppliers are:

Ø	GOEX, Inc., Minden, LA	Black Powder
Ø	ATK, Radford, VA	Propellant
Ø	Flexible Concepts, Elkhart, IN	Metal Component
Ø	Woodlawn Manufacturing, Marshall, TX	Metal Component
Ø	B & T Screw, Bristol, CT	Metal Component
Ø	Spaulding Composites, Rochester, NH	Plastic Component

Metal Parts Manufacturing

          Valentec’s current U.S. government metal parts work consists of a contract for 50,000 units of 105MM, M14B4, Spiral Wrapped Cartridge Case (SWCC). This contract value is approximately $1.9 million with 100% options for each year, fiscal year 2006 and fiscal year 2007 bringing the total potential to approximately $6 million over the next 3 years. Valentec believes there may be a significant foreign interest once the success of its program is realized. Valentec has produced a large volume of these products. Valentec believes this product cost is significantly less than the more traditional drawn/forged cartridge case and exhibits more insensitive munitions (IM) value than the solid cartridge cases. The use of this design (SWCC) should provide Valentec an advantage for the upcoming 105MM Illumination round requirements for the U.S. Army.

          In addition, Valentec is evaluating several other metal part manufacturing opportunities, which will be procured in 2006 by U.S. Army.

          Metal parts manufacturing and more specifically the spiral wrap cartridge case has only 4 primary components, and no specialty materials. Further, there are no exceptional government approvals required. Valentec primary suppliers are:

Ø	Vy-Comp, Shreveport, LA	Metal Components
Ø	Northwest Stamping, St. Louis, MO	Metal Components
Ø	Alta Max, New Orleans, LA	Packaging

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Foreign Work

          Valentec’s foreign business pursuits are associated with two contracting methods, “foreign military sales” and “foreign military financing.” A description of each method follows.

    Ø  Foreign Military Sales. The foreign military sales program is the government-to-government method of selling U.S. defense equipment, services, and training. The program is managed by the Defense Security Cooperation Agency within the U.S. Department of Defense. Valentec participates in the program as a known supplier to approved foreign governments through a marketing network established in the foreign countries. Department of Defense Manual 5105.38-M describes the specific details concerning the program requirements.

          The U.S. Department of Defense has launched a major effort to reform the current foreign military sales system and to ensure that this valuable program remains viable into the next millennium. This reform effort will focus on improving the foreign military sales system’s performance and adopting better business practices whenever possible. Currently, Valentec does not believe these anticipated changes would adversely affect its business. The foreign military sales program manages government-to-government purchases of weapons and other defense articles, defense services, and military training. A military buying weapons through the foreign military sales program does not deal directly with the business that manufactures the weapons, but rather, the Defense Department serves as an intermediary, usually handling procurement, logistics and delivery and often providing product support and training.

    Ø  Foreign Military Financing. The foreign military financing program provides grants and loans to help foreign countries purchase U. S. produced weapons, defense equipment, defense services and military training through the foreign military sales program described above. On a much less frequent basis, foreign military financing also funds purchases made through the direct commercial sales program (described below), which oversees sales between foreign governments to private U.S. companies. Foreign military financing does not provide cash grants to other countries; it generally pays for sales of specific goods or services through foreign military or direct commercial sales.

          The State Department’s Bureau of Political-Military Affairs sets policy for the foreign military financing program, while the Defense Security Cooperation Agency, within the Defense Department, manages it on a day-to-day basis. Security assistance organizations and military personnel in U.S. embassies overseas play a key role in managing foreign military financing within recipient countries. Congress appropriates funds for foreign military sales through the yearly Foreign Operations Appropriations Act.

          Foreign military financing exists primarily to fund arms transfers, as military training is normally granted through the International military education and training program. However, foreign military financing does support some of the training activities.

          The Contracting Process.Valentec has Marketing/Sales representation at two of its largest customer locations in the United States: (1) Picatinny Arsenal in Dover, New Jersey and (2) the Joint Munitions Command in Rock Island, Illinois. These representatives keep Valentec informed as to any new business opportunities that are on the horizon that would fit into the company’s capabilities, and therefore, allows the company to conduct proposal activities prior to the

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actual receipt of any solicitation or request for a proposal. Typically, these solicitations or requests are of a “Best Value” evaluation criteria, meaning that the evaluation is based on many factors (not only price) such as past performance, quality assurance plans, manufacturing approach, etc. This kind of evaluation requires extensive proposal writing skills and the company often uses outside consultants who specialize in writing proposals that are responsive to all of the requirements of U.S. Government customers.

          Typically, the U.S. Government allows 60 days for contractors to respond to their solicitations or requests for proposals. They, in turn, will take anywhere from 60 days or longer to conduct their evaluations and make the ultimate contract award. Most contracts are of a 12-month duration and require a First Article Test prior to the start of production. In some cases, these contracts will have out-year options; however, the Government has no obligation to exercise these options.

          With regard to international sales, Valentec uses Valentec International Limited of the United Kingdom and Soltam Systems, Inc. of Israel to market its products and capabilities. Each of these business entities is controlled by directors of the Company. All Valentec Systems, Inc.’s international business has been through either Foreign Military Sales or direct sales to the foreign country. In either case, the customer must submit to Valentec an “End User Certificate” that states who the End User will be. That End User Certificate is submitted to the U. S. State Department along with an entire copy of the contract between Valentec and its foreign customer. For example, if Valentec has a contract with Soltam Systems, Inc. to supply both weapon systems and ammunition for mortars, and Soltam Systems, Inc. in turn, has a contract with the Israeli Defense Forces for the same product, then the Israeli Defense Forces would be the End User. Because funds for this procurement would likely involve U.S. military grant dollars to Israel, the products would have to be manufactured in the United States. Valentec would ultimately ship these products by sea to the required location. Or, if Valentec had a contract with Valentec International Limited, UK, to supply 40mm illuminating rounds of ammunition to Saudi Arabia through a direct sale; i.e., no foreign military funds, the requirements for End User Certificate would still apply before the U. S. State Department would approve the sale. The end product would be produced by Valentec Systems, Inc. and shipped directly to the foreign customer.

          Any and all foreign sales require End User Certificates and the U. S. State Department’s approval.

Customers

     Soltam Systems, Inc.

          Valentec has received an order from Soltam Systems, Inc. (“Soltam”) for the production and integration of the Keshet RMS6 120mm Mortar Weapon System for the Israeli Defense Forces. The mortar weapon system will be fitted with an Electronic Fire Control System and will be integrated in to M1064A3 Mortar carriers as well as towed platforms. Delivery of the Mortar System will begin in calendar year 2006.

          The Keshet 120mm self propelled mortar contains state of the art command, control and communication devices and offers infantry and armor commanders unique enhanced operational capabilities. Improvements in inertial navigation systems further enhance the accuracy in target and weapon location and, combined with a more sophisticated laying system, it greatly increases the

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accuracy of mortar ammunition delivery. The 120mm mortar system offers significant advantages in firepower, area coverage, tactical mobility, flexibility and survivability.

          The Keshet 120mm mortar is a Soltam design. The mortar weapon system will be produced at Valentec’s manufacturing facility in Minden, Louisiana. Valentec expects to complete this order in December 2006.

          The program consists of technology transfer, configuration control, procurement, assembly, integration and testing of a 120MM Mortar Weapon System with electronic Firing Control. It is anticipated that, a total of 82 complete integrated systems and 12 equivalent spare parts of the system will be delivered under this contract to Soltam Systems, Inc. which in turn will deliver them to the End User, the Israeli Defense Forces. Soltam will receive part of the revenues from the sale of the products involving the technology.

          In addition, Valentec was awarded a 2-year systems integration and management contract in early 2005 from Soltam Systems, Inc. to assemble and deliver mortar ammunition to Soltam Systems, Inc. for delivery to the Israeli Defense Forces. The mortar ammunition will be provided in 120mm, 81mm, and 60mm rounds. The 120mm and 60mm were ordered with two different explosive fillers each and the 81mm was ordered in a single configuration for a total of five different rounds. Valentec anticipates that deliveries will begin in late 2005 and be completed in December 2006.

     DSE, Inc.

     DSE, Inc., located in Tampa Florida is a significant contractor for procurement of 40mm products. DSE, Inc. has ordered 59,708 40mm, M583 products from Valentec. Valentec expects to complete the initial purchase order in May 2006. DSE, Inc. has been awarded U.S. Government Contract #W52P1J-05-O-0036. This contract pertains to the 40MM family of munitions and is projected to cover the next five years. Valentec has been named as the sub-contractor to produce the Illumination Rounds found in this contract. In the Solicitation, the U.S. Government estimated the annual requirement for Illumination Rounds would be 200,000 to 300,000 rounds per year. This would indicate substantial sales for Valentec dependent upon which option quantity the U.S. Government decides to procure.

     Kingdom of Saudi Arabia

     Valentec is currently fulfilling a contract received on assignment from Valentec International, Limited, UK, to provide 4,000 M583A1 40mm illuminating parachutes and 2,000 M585 40mm illuminating munitions for the Kingdom of Saudi Arabia. We anticipate completion of this purchase order in the first quarter of 2006.

     U.S. Government

     Valentec is currently fulfilling contracts from the U. S. Army for multiple products.

Ø	50,000 – Spiral Wrap Cartridge Cases M14B4
Ø	49,456 – 40MM White Star Cluster M585
Ø	21,692 – 40MM Green Star Parachute M661

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Ø	108,768 – 40MM White Star M583
Ø	134,080 – M74 Simulators

The U.S. Army can exercise option quantities under each contract with Valentec.

Off Balance Sheet Arrangements

          The Company has no off balance sheet arrangements.

ITEM 3.  Controls and Procedures

          (A)     Evaluation Of Disclosure Controls And Procedures

          As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company’s disclosure control objectives. The Company’s Chief Executive Officer and Principal Financial and Accounting Officer have concluded that the Company’s disclosure controls and procedures are, in fact, effective at this reasonable assurance level. In addition, the Company reviewed its internal controls, and there have been no significant changes in its internal controls or in other factors that could significantly affect those controls subsequent to the date of their last valuation or from the end of the reporting period to the date of this Form 10-QSB.

          (B)     Changes In Internal Controls

          In connection with the evaluation of the Company’s internal controls during the Company’s third fiscal quarter ended September 30, 2005, the Company’s Chief Executive Officer and Principal Financial and Accounting Officer have determined that there are no changes to the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, the Company’s internal controls over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

The Company is not currently a party to any material legal proceedings and to our knowledge, no such proceedings are threatened or contemplated.

ITEM 2.     Changes in Securities

(a) None.

(b) None. (c)

(c)  On August 19, 2005, the Company completed a private placement of securities to each of Messrs. Zummo, Gilat, Mathson, and Kreisman pursuant to which each of Mr. Zummo and Mr. Gilat received Warrants to purchase up to 200,000 shares of Common Stock at an exercise price of $0.25 per share. Each of Mr. Matheson and Mr. Kreisman received Warrants to purchase up to 100,000 shares of Common Stock at an exercise price of $0.25 per share. The Warrants are immediately exercisable and expire on August 19, 2008. In connection with the private placement, Acorn relied on an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder. Messrs. Zummo, Gilat, Matheson, and Kreisman represented to the Company that they were “accredited investors” as defined in Rule 501(a) promulgated in the Securities Act and that they were receiving the Warrants for their own account and not with a present view towards the public sale or distribution thereof.

(d) None.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.     OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

(a) Exhibits

10.1      Warrant to Purchase Common Stock of Acorn Holding Corp., dated as of August 19, 2005 (incorporated by reference as Exhibit 10.1 to the Company’s Report on Form 8-K filed on August 24, 2005).

10.2      Warrant to Purchase Common Stock of Acorn Holding Corp., dated as of August 19, 2005 (incorporated by reference as Exhibit 10.2 to the Company’s Report on Form 8-K filed on August 24, 2005).

10.3      Warrant to Purchase Common Stock of Acorn Holding Corp., dated as of August 19, 2005 (incorporated by reference as Exhibit 10.3 to the Company’s Report on Form 8-K filed on August 24, 2005).

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10.4      Warrant to Purchase Common Stock of Acorn Holding Corp., dated as of August 19, 2005 (incorporated by reference as Exhibit 10.4 to the Company’s Report on Form 8-K filed on August 24, 2005).

10.5      Master Factoring Agreement, dated September 1, 2005 among Acorn Holding Corp., Valentec Systems, Inc. and Rockland Credit Finance LLC (incorporated by reference as Exhibit 10.1 to the Company’s Report on Form 8-K filed on September 8, 2005).

10.6      Addendum Number 1 to MFA dated September 1, 2005, among Acorn Holding Corp., Valentec Systems, Inc. and Rockland Credit Finance LLC (incorporated by reference as Exhibit 10 to the Company’s Report on Form 8-K filed on September 8, 2005).

10.7      Revolving Credit Promissory Note, dated September 1, 2005, among Acorn Holding Corp., Valentec Systems, Inc. and Rockland Credit Finance LLC (incorporated by reference as Exhibit 10.3 to the Company’s Report on Form 8-K filed on September 8, 2005).

31.1      Certification by the Chief Executive Officer pursuant to 18 U.S.L. 1350, as adopted pursuant to Rule 13a-14(a) of the Exchange Act.

31.2      Certification of the Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Rule 13a-14(a) of the Exchange Act.

32.1      Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2      Certification of the Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

          (b) Reports on Form 8-K. The Company filed the following reports on Form 8-K for the period covered by this report:

	Date	Items
1.	September 8, 2005	1.01, 2.03 and 9.01
2.	August 24, 2005	1.01, 3.02 and 9.01
3.	August 10, 2005	2.01, 5.02 and 9.01

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SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ACORN HOLDING CORP.
Date: February 9, 2006
	/s/ Robert A. Zummo
	Robert A. Zummo
	Chief Executive Officer

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