**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

** **

**FORM 10-Q**

** **
| **ý** | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|------------|------------|--------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                             |
| ** ** | ** ** | **For the quarterly period ended March 31,  2006.**                                               |

 

**or**

 
| **o**      | ** ** | **Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|------------|------------|----------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                   |
| ** ** | ** ** | **For the transition period from to .**                                                      |

 

**Commission File Number: 000-51444**

 

**Stone Arcade Acquisition Corporation**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                      | **20-2699372**                          |
|-------------------------------------------------------------------|-----------------------------------------|
| (State or  Other Jurisdiction of

Incorporation  or Organization) | (I.R.S.  Employer

Identification  No.) |

 

**c/o Stone-Kaplan Investments, LLC, One NorthfieldPlaza, Suite 480**

**Northfield, IL 60093**

(Address of Principal Executive Offices including zipcode)

 

**(847) 441-0929**

(Registrant’s Telephone Number, Including Area Code)

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2 ofthe Exchange Act).

 

| Large  Accelerated Filer o |   | Accelerated  Filer o |   | Non-Accelerated  Filer ý |
|----------------------------|--------|----------------------|--------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes ý Noo

 

There were25,000,000 shares of the Registrant’s Common Stock issued and outstanding on May 12,2006.

 

 

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**StoneArcade Acquisition Corporation Index to Form 10-Q**

 

**TABLE OFCONTENTS**

 
| PART I. - FINANCIAL INFORMATION                                                         |   |
|----------------------------------------------------------------------------------------------|--------|
|                                                                                         |   |
| Item 1. - FINANCIAL  STATEMENTS (UNAUDITED)                                                  |   |
|                                                                                         |   |
| Item 2. – MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS |   |
|                                                                                         |   |
| Item 3. - QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                        |   |
|                                                                                         |   |
| Item 4. - CONTROLS AND PROCEDURES                                                            |   |
|                                                                                         |   |
| PART II. - OTHER INFORMATION                                                            |   |
|                                                                                         |   |
| Item 1. - LEGAL PROCEEDINGS                                                                  |   |
|                                                                                         |   |
| Item  1A. - RISK FACTORS                                                                     |   |
|                                                                                         |   |
| Item 2. - UNREGISTERED SALES  OF EQUITY SECURITIES AND USE OF PROCEEDS                       |   |
|                                                                                         |   |
| Item 3. - DEFAULTS UPON  SENIOR SECURITIES                                                   |   |
|                                                                                         |   |
| Item 4. - SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                               |   |
|                                                                                         |   |
| Item 5. - OTHER INFORMATION                                                                  |   |
|                                                                                         |   |
| Item  6. - EXHIBITS                                                                          |   |
|                                                                                         |   |
| SIGNATURES                                                                                   |   |

 

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# **PART I.- FINANCIALINFORMATION**

# ** **

**Item 1. -   FINANCIAL STATEMENTS(UNAUDITED)**

 

**Stone Arcade Acquisition Corporation(a development stage company)**

 

**Condensed Balance Sheet**

 
| ** **                                                                                                                                                                                   | ** ** | **March 31** | ** **  | **December 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2006**          | ** **  | **2005**             | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(unaudited)**   | ** **  | ** **           | ** ** |
| **Assets**                                                                                                                                                                                   | ** ** | ** **        | ** **  | ** **           | ** ** |
| Current  assets:                                                                                                                                                                             |       |              |        |                 |       |
| Cash                                                                                                                                                                                         |       | $                 | 2,614,317   |                 | $          | 2,157,611 |   |
| Cash and  investments, held in trust                                                                                                                                                         |       | 112,574,790       |        | 111,965,034          |       |
| Prepaid  expenses                                                                                                                                                                            |       | 77,325            |        | 128,875              |       |
| Total  current assets                                                                                                                                                                        |       | 115,266,432       |        | 114,251,520          |       |
| Deferred  income taxes                                                                                                                                                                       |       | 126,676           |        | 74,161               |       |
| Total assets                                                                                                                                                                                 |       | $                 | 115,393,108 |                 | $          | 114,325,681 |   |
|                                                                                                                                                                                         |       |              |        |                 |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                               | ** ** | ** **        | ** **  | ** **           | ** ** |
| Current  liabilities:                                                                                                                                                                        |       |              |        |                 |       |
| Accrued  expenses                                                                                                                                                                            |       | $                 | 613,580     |                 | $          | 156,405 |   |
| Deferred  income taxes                                                                                                                                                                       |       | 9,351             |        | 90,521               |       |
| Total  current liabilities                                                                                                                                                                   |       | 622,931           |        | 246,926              |       |
|                                                                                                                                                                                         |       |              |        |                 |       |
| Common  stock, subject to possible redemption — 3,998,000 shares                                                                                                                        |       | 22,159,715        |        | 22,159,715           |       |
| Deferred  interest attributable to common stock subject to possible redemption (net of  taxes of $177,790)                                                                                   |       | 345,121           |        | 189,462              |       |
|                                                                                                                                                                                         |       | 22,504,836        |        | 22,349,177           |       |
|                                                                                                                                                                                         |       |              |        |                 |       |
| Commitments  and contingencies (Note E)                                                                                                                                                      |       |              |        |                 |       |
|                                                                                                                                                                                         |       |              |        |                 |       |
| Stockholders’  equity:                                                                                                                                                                  |       |              |        |                 |       |
| Preferred  stock – $.0001 par value; 1,000,000 shares authorized; 0 shares issued and  outstanding                                                                                      |       | —            |        | —               |       |
| Common stock  – $.0001 par value, 175,000,000 shares authorized; 25,000,000 shares issued  and outstanding (including 3,998,000 shares of common stock subject to  possible redemption) |       | 2,500             |        | 2,500                |       |
| Additional  paid-in capital                                                                                                                                                                  |       | 91,098,761        |        | 91,098,761           |       |
| Income  accumulated during the development stage                                                                                                                                             |       | 1,164,080         |        | 628,317              |       |
| Total  stockholders’ equity                                                                                                                                                             |       | 92,265,341        |        | 91,729,578           |       |
| Total  liabilities and stockholders’ equity                                                                                                                                             |       | $                 | 115,393,108 |                 | $          | 114,325,681 |   |

 

*See notesto condensed unaudited financial statements.*

 

1

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**StoneArcade Acquisition Corporation(a development stage company)**

 

**CondensedStatement of Operations (unaudited)**

 
| ** **                                                                                          | ** ** | ** **            | ** ** | **Accumulated**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                          | ** ** | **Three**             | ** ** | **Inception**     | ** ** |
| ** **                                                                                          | ** ** | **Months Ended** | ** ** | **Through**       | ** ** |
| ** **                                                                                          | ** ** | **March 31**     | ** ** | **March 31** | ** ** |
| ** **                                                                                          | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Cost and  expenses:                                                                                 |       |                  |       |              |       |
| Operating  expenses                                                                                 |       | $                     | 154,457    |              | $          | 375,557 |   |
|                                                                                                |       |                  |       |              |       |
| Other  income:                                                                                      |       |                  |       |              |       |
| Bank  interest                                                                                      |       | 27,235                |       | 51,359            |       |
| Interest  income                                                                                    |       | 1,179,830             |       | 2,615,864         |       |
| Total other  income                                                                                 |       | 1,207,065             |       | 2,667,223         |       |
| Income  before provision for income taxes:                                                          |       | 1,052,608             |       | 2,291,666         |       |
|                                                                                                |       |                  |       |              |       |
| Provision  for income taxes:                                                                        |       |                  |       |              |       |
| Current                                                                                             |       | 494,871               |       | 899,790           |       |
| Deferred                                                                                            |       | (133,685              | )          | (117,325          | )          |
| Total  provision for income taxes                                                                   |       | 361,186               |       | 782,465           |       |
| Net income                                                                                          |       | 691,422               |       | 1,509,201         |       |
|                                                                                                |       |                  |       |              |       |
| Deferred  interest, net of taxes, attributable to common stock subject to possible  redemption      |       | (155,659              | )          | (345,121          | )          |
| Net income  allocable to holders of non-redeemable common stock                                     |       | $                     | 535,763    |              | $          | 1,164,080 |   |
|                                                                                                |       |                  |       |              |       |
| Weighted-average  number of shares outstanding:                                                     |       |                  |       |              |       |
| Basic                                                                                               |       | 25,000,000            |       | 17,800,000        |       |
| Diluted                                                                                             |       | 28,768,116            |       | 19,783,764        |       |
|                                                                                                |       |                  |       |              |       |
| Earnings per  share:                                                                                |       |                  |       |              |       |
| Basic                                                                                               |       | $                     | 0.03       |              | $          | 0.08 |   |
| Diluted                                                                                             |       | $                     | 0.02       |              | $          | 0.08 |   |
|                                                                                                |       |                  |       |              |       |
| Weighted-average  number of shares outstanding exclusive of shares subject to possible redemption:  |       |                  |       |              |       |
| Basic                                                                                               |       | 21,002,000            |       | 15,241,280        |       |
| Diluted                                                                                             |       | 24,770,116            |       | 17,225,044        |       |
|                                                                                                |       |                  |       |              |       |
| Earnings per  share exclusive shares and related deferred interest subject to possible  redemption: |       |                  |       |              |       |
| Basic                                                                                               |       | $                     | 0.03       |              | $          | 0.08 |   |
| Diluted                                                                                             |       | $                     | 0.02       |              | $          | 0.07 |   |
|                                                                                                |       |                  |       |              |       |

 

*See notesto condensed unaudited financial statements.*

 

2

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**Stone Arcade Acquisition Corporation(a development stage company)**

 

**CondensedStatement of Cash Flows (unaudited)**

 
| ** **                                                   | ** ** | ** **            | ** ** | **Accumulated**   | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | **Three**             | ** ** | **Inception**     | ** ** |
| ** **                                                   | ** ** | **Months Ended** | ** ** | **Through**       | ** ** |
| ** **                                                   | ** ** | **March 31**     | ** ** | **March 31** | ** ** |
| ** **                                                   | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| **Operating  activities**                                    | ** ** | ** **            | ** ** | ** **        | ** ** |
| Net income                                                   |       | $                     | 691,422    |              | $          | 1,509,201 |   |
| Changes in:                                                  |       |                  |       |              |       |
| Interest  receivable on short-term investments               |       | 238,734               |       | (27,505           | )          |
| Prepaid  expenses                                            |       | 51,550                |       | (77,325           | )          |
| Accrued  expenses                                            |       | 457,175               |       | 613,580           |       |
| Deferred  income taxes                                       |       | (133,685              | )          | (117,325          | )          |
| Net cash  provided by operating activities                   |       | 1,305,196             |       | 1,900,626         |       |
|                                                         |       |                  |       |              |       |
| **Investing  activities**                                    |       |                  |       |              |       |
| Purchase of  US Government Securities held in trust          |       | (451,089,490          | )          | (1,007,854,499    | )          |
| Maturities  of US Government Securities held in trust        |       | 450,241,000           |       | 895,307,214       |       |
| Net cash  used in investing activities                       |       | (848,490              | )          | (112,547,285      | )          |
|                                                         |       |                  |       |              |       |
| **Cash  flows provided by financing activities**             | ** ** | ** **            | ** ** | ** **        | ** ** |
| Proceeds  from public offering, net of expenses              |       | —                |       | 113,235,876       |       |
| Proceeds  from sale of common stock to founding shareholders |       | —                |       | 25,000            |       |
| Proceeds  from notes payable to stockholders                 |       | —                |       | 200,000           |       |
| Repayment of  notes to stockholders                          |       | —                |       | (200,000          | )          |
| Proceeds  from issuance of underwriters’option          |       | —                |       | 100               |       |
|                                                         |       | —                |       | 113,260,976       |       |
|                                                         |       |                  |       |              |       |
| Net increase  in cash                                        |       | 456,706               |       | 2,614,317         |       |
| Cash –  beginning of period                             |       | 2,157,611             |       | —            |       |
| Cash – end  of period                                   |       | $                     | 2,614,317  |              | $          | 2,614,317 |   |

 

*See notesto condensed unaudited financial statements.*

 

3

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**Stone Arcade AcquisitionCorporation(a development stage company)Notes to Condensed Unaudited Financial Statements**

 

**Note A. Basisof Presentation, Use of Estimates and Reclassifications**

 

Theaccompanying unaudited financial statements have been prepared in accordancewith U.S. generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements. In the opinion of management, all normal recurringadjustments considered necessary for a fair presentation have been included.The results of operations for the three month period ended March 31, 2006are not necessarily indicative of the results to be expected for the yearending  December 31, 2006.

 

Thecondensed balance sheet at December 31, 2005 has been derived from the auditedconsolidated financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

4

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**Stone ArcadeAcquisition Corporation**

**(adevelopment stage company)**

**Notes toCondensed Unaudited Financial Statements (continued)**

 

Forfurther information, refer to the financial statements and footnotes theretoincluded in Stone Arcade Acquisition Corporation’s annual report on Form 10-Kfor the year ended December 31, 2005.

 

Certainprior period amounts have been reclassified in order to conform to currentyear presentation.

 

**Note B. Organization, Business Operations and SubsequentEvents**

 

StoneArcade Acquisition Corporation was incorporated in Delaware on April 15,2005. The Company was formed to serve as a vehicle for the acquisition througha merger, capital stock exchange, asset acquisition, or other similar businesscombination (Business Combination) of an operating business in the paper,packaging, forest products and related industries. The Company has neitherengaged in any operations nor generated operating revenue. The Company isconsidered to be in the development stage and is subject to the risks associatedwith activities of development stage companies. The Company has selected December 31as its fiscal year end.

 

Theregistration statement for the Company’s initial public offering (the Offering)was declared effective on August 15, 2005. The Company consummated theOffering on August 19, 2005 and received net proceeds of approximately$113,236,000. The Company’s management has broad discretion with respect to thespecific application of the net proceeds of the Offering (as described in NoteC), although substantially all of the net proceeds of the Offering are intendedto be generally applied toward a Business Combination. Furthermore, there is noassurance that the Company will be able to successfully effect a BusinessCombination. Of the net proceeds, $112,574,790, including interest earned of$2,615,864, less operating expenses and taxes, is being held in a trust account(Trust Fund) and invested in government securities until the earlier of: (i) theconsummation of the first Business Combination or (ii) the distribution ofthe Trust Fund as described below.

 

Theinterest income is subject to additional taxes incurred, but not yet paid, asof March 31, 2006. The remaining proceeds may be used to pay forbusiness, legal and accounting due diligence on prospective businesscombinations and continuing general and administrative expenses. The Company,after signing a definitive agreement for the acquisition of a target business,will submit such transaction for stockholder approval. In the event that holdersof 20 percent or more of the shares issued in the Offering vote againstthe Business Combination and elect to redeem their shares, the BusinessCombination will not be consummated. If a majority of the shares voted at themeeting by public stockholders are voted in favor of the Business Combinationand holders of less than 20 percent of the shares issued in the Offeringvote against the Business Combination and elect to have their shares redeemed,the Business Combination will be consummated and the shares of such holderswill be redeemed at the net offering price, approximately $5.54, plus interestincome allocable to such shares, net of income taxes. The number of sharessubject to possible redemption is approximately 3,998,000. At March 31,2006, the Company has classified approximately $22,504,836 of the net proceedsfrom the Offering inclusive of interest, but net of taxes, as common stocksubject to possible redemption in the accompanying balance sheet.

 

In theevent that the Company does not consummate a Business Combination within18 months from the date of the consummation of the Offering, or24 months from the consummation of the Offering if certain extensioncriteria have been satisfied (the Acquisition period), the proceeds held in theTrust Fund will be distributed to the Company’s public stockholders, excludingthe persons who were stockholders prior to the Offering (the FoundingStockholders) to the extent of their initial stock holdings. However, theFounding Stockholders will participate in any liquidation distribution withrespect to any shares of common stock they acquired in connection with orfollowing the Offering. In the event of such distribution, it is likely thatthe per share value of the residual assets remaining available for distribution(including Trust Fund assets) will be less than the initial public offeringprice per share in the Offering (assuming no value is attributed to theWarrants contained in the Units in the Offering discussed in Note C).

 

**Note C. Initial Public Offering**

 

On August 19,2005, the Company sold 20,000,000 units (Units). Each Unit consisted of oneshare of the Company’s common stock, $.0001 par value, and two warrants(Warrants). Each Warrant entitles the holder to purchase from the Company oneshare of common stock at an exercise price of $5.00. Each warrant isexercisable on the later of: (a) the completion of a Business Combinationor (b) August 15, 2006, and expires on August 15,

 

5

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**StoneArcade Acquisition Corporation**

**(adevelopment stage company)**

**Notes toCondensed Unaudited Financial Statements (continued)**

 

2009.The Warrants are redeemable at a price of $.01 per Warrant upon 30 daysnotice after the Warrants become exercisable, only in the event that the lastsale price of the common stock is at least $8.50 per share for any20 trading days within a 30 trading day period ending on the thirdbusiness day prior to the date on which notice of redemption is given.

 

Inconnection with the Offering, the Company paid the underwriters an underwritingdiscount of five percent of the gross proceeds of the Offering. TheCompany also issued for $100 an option to the representative of theunderwriters to purchase up to a total of 1,000,000 units at a price of $7.50 perunit. The units issuable upon the exercise of this option are identical tothose offered in the prospectus, except that the exercise price of the warrantsincluded in the underwriters’ purchase option is $6.25. This option isexercisable commencing on the later of the consummation of a businesscombination or one year from the date of the Offering, expires five years fromthe date of the Offering, and may be exercised on a cashless basis. Theoption may not be sold, transferred, assigned, pledged or hypothecateduntil August 16, 2006. However, the option may be transferred to anyunderwriter and selected dealer participating in the Offering and their bonafide officers or partners.

 

Theholders of the option have demand and piggy-back registration rights under theSecurities Act for periods of five and seven years, respectively, from the dateof the Offering with respect to registration of the securities directly andindirectly issuable upon exercise of the option. The exercise price and numberof units issuable upon exercise of the option may be adjusted in certaincircumstances, including issuances of a stock dividend, recapitalization,reorganization, merger or consolidation. However, the option will not beadjusted for issuances at a price below its exercise price.

 

TheCompany has estimated, based upon a Black Scholes model, that the fair value ofthe purchase option on the date of sale was approximately $980,000. The Companyaccounted for this purchase option, inclusive of the receipt of the $100 cash payment,as an expense of the Offering resulting in a charge directly to stockholders’equity. Accordingly there was no impact in the Company’s financial position orresults of operations except for the recording of the $100 proceeds from thesale.

 

In accordancewith a commitment entered into in connection with the Offering, the FoundingStockholders have purchased 3,500,000 warrants in the public marketplace. Theyhave further agreed that warrants purchased by them or their affiliates willnot be sold or transferred until the completion of a Business Combination.

 

**Note D. Related-Party Transactions**

 

TheCompany has agreed to pay Stone-Kaplan Investments, LLC, an entity wherecertain of the Founding Stockholders serve in executive capacities, anadministrative fee of $7,500 per month for office space and general andadministrative services from August 15, 2005 through the acquisition dateof a target business. Stone-Kaplan Investments LLC has agreed to pay a portionof the aforementioned administration fee to Arcade Partners LLC, a companywhere certain of the Founding Stockholders serve in executive capacities. Fromtime to time the Company retains the services of White Oak Aviation, a companysolely owned by certain Founding Stockholders. For the quarter ended March 31,2006, the amount paid to this entity was $22,500.

 

TheFounding Stockholders have agreed with the Company and the underwriters that ifthe Company liquidates prior to the consummation of a Business Combination,they will be personally liable to pay debts and obligations to vendors that areowed money by the Company for services rendered or products sold to us inexcess of the net proceeds not held in the trust account at that time.

 

6

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**Stone ArcadeAcquisition Corporation**

**(adevelopment stage company)**

**Notes toCondensed Unaudited Financial Statements (continued)**

 

**Note E. Commitments and Contingencies**

 

TheCompany has engaged the representative of the underwriters to act as itsinvestment banker in connection with a Business Combination. The Company hasagreed to pay the representative a cash fee of $1,200,000 at the closing of theBusiness Combination for assisting the Company in structuring and negotiatingthe terms of the transaction.

 

**Note F. Common Stock Reserved for Issuance**

 

At March 31,2006, 43,000,000 shares of common stock were reserved for issuance uponexercise of warrants and the underwriter’s option.

 

7

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**Item 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS****OF OPERATIONS**

 

ThisQuarterly Report on Form 10-Q includes forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. We have based theseforward-looking statements on our current expectations and projections aboutfuture events. These forward-looking statements are subject to known andunknown risks, uncertainties and assumptions about us that may cause ouractual results, levels of activity, performance or achievements to bematerially different from any future results, levels of activity, performanceor achievements expressed or implied by such forward-looking statements. Insome cases, you can identify forward-looking statements by terminology such as “may,”“should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“continue,” or the negative of such terms or other similar expressions. Factorsthat might cause or contribute to such a discrepancy include, but are notlimited to, those described in our other Securities and Exchange Commissionfilings. The following discussion should be read in conjunction with ourFinancial Statements and related Notes thereto included elsewhere in thisreport.

 

**Overview**

 

Wewere formed on April 15, 2005, to serve as a vehicle to effect a merger,capital stock exchange, asset acquisition or other similar business combinationwith an operating business in the paper, packaging, forest products and relatedindustries. Our initial business combination must be with a target business orbusinesses whose fair market value is at least equal to 80% of our net assetsat the time of such acquisition. We intend to utilize cash derived from theproceeds of our recently completed public offering, our capital stock, debt ora combination of cash, capital stock and debt, in effecting a businesscombination.

 

**Critical Accounting Policies**

 

*Use ofEstimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofexpenses during the reporting period. Actual results could differ from thoseestimates.

 

**Results of Operations for the Quarter Ending March 31,2006**

 

For the quarter ending March 31, 2006 we earned netincome after taxes of $535,763 ($691,422 before the deduction of $155,659 ofnet interest attributable to common stock subject to possible redemption).Since we did not have any operations, all of our income was derived frominterest income, most of which was earned on funds held in the trust account.Our operating expenses during the period were $154,457 and consisted primarilyof expenses related to pursuing a business combination, professional fees andthe monthly administrative fee of $7,500 paid to Stone-Kaplan Investments. Wealso provided for $361,186 in income taxes.

 

8

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**Liquidity and Capital Resources**

 

Wehave had no material changes in liquidity and capital resources in thethree-month period ended March 31, 2006.

 

**Off-Balance Sheet Arrangements**

 

We havenever entered into any off-balance sheet financing arrangements and have neverestablished any special purpose entities. We have not guaranteed any debt orcommitments of other entities or entered into any options on non-financialassets.

 

**Contractual Obligations**

 

We donot have any long term debt, capital lease obligations, operating leaseobligations, purchase obligations or other long term liabilities.

 

**Item 3.-   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Marketrisk is the sensitivity of income to changes in interest rates, foreignexchanges, commodity prices, equity prices, and other market-driven rates orprices. We are not presently engaged in and, if a suitable business target isnot identified by us prior to the prescribed liquidation date of the trustfund, we may not engage in, any substantive commercial business.Accordingly, we are not and, until such time as we consummate a businesscombination, we will not be, exposed to risks associated with foreign exchangerates, commodity prices, equity prices or other market-driven rates or prices.The net proceeds of our initial public offering held in the trust fund havebeen invested only in money market funds meeting certain conditions under Rule 2a-7promulgated under the Investment Company Act of 1940. Given our limited risk inour exposure to money market funds, we do not view the interest rate risk to besignificant.

 

**Item 4.-   CONTROLS AND PROCEDURES**

 

Anevaluation of the effectiveness of our disclosure controls and procedures as ofMarch 31, 2006 was made under the supervision and with the participationof our management, including our chief executive officer who also serves as ourprincipal financial officer. Based on that evaluation, he concluded that ourdisclosure controls and procedures are effective as of the end of the periodcovered by this report to ensure that information required to be disclosed byus in reports that we file or submit under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms. Duringthe most recently completed fiscal quarter, there has been no significantchange in our internal control over financial reporting that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

9

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# **PART II. - OTHERINFORMATION**

# ** **

**Item 1.-   LEGAL PROCEEDINGS**

 

None.

 

#### **Item 1A.- RISK FACTORS**

####  

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2005, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing our Company.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

**Item 2.-   UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

On August 19, 2005,we consummated our initial public offering of 20,000,000 units. Each unitconsists of one share of common stock and two redeemable common stock purchasewarrants. Each warrant entitles the holder to purchase from us one share of ourcommon stock at an exercise price of $5.00. The units were sold at an offeringprice of $6.00 per unit, generating total gross proceeds of $120,000,000.Morgan Joseph & Co. Inc. acted as lead underwriter. The securitiessold in the offering were registered under the Securities Act of 1933 on aregistration statement on Form S-1 (No. 333-124601). The Securitiesand Exchange Commission declared the registration statement effective on August 15,2005.

 

We paid a total of$6,000,000 in underwriting discounts and commissions, and approximately$764,000 was paid for costs and expenses related to the public offering.

 

After deducting theunderwriting discounts and commissions and the offering expenses, the total netproceeds to us from the offering were approximately $113,236,000, of which$110,854,000 (or $5.54 per unit sold in the offering) was deposited into a trustaccount and the remaining proceeds are available to be used to provide forbusiness, legal and accounting due diligence on prospective businesscombinations and continuing general and administrative expenses.

 

From January 1, 2006through March 31, 2006, we used approximately $154,457 of the net proceedsthat were not deposited into the trust fund to pay operating expenses thatconsisted primarily of expenses related to pursuing a business combination,professional fees and monthly administrative fee of $7,500 paid to Stone-KaplanInvestments. As of March 31, 2006, there was $112,574,790, includingaccrued interest receivable of $27,505, held in the trust fund.

 

The net proceeds of theoffering in the amount of $110,854,000 deposited into the trust fund have beeninvested in short-term U.S. Government Securities, specifically Treasury Bills,having a maturity date of 180 days or less.

 

**Item 3.-   DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**Item 4.-   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

**Item 5.-   OTHER INFORMATION**

 

None.

 

**Item 6.-   EXHIBITS**

 
| (b)    |   | Exhibits |
|--------|--------|----------|
|   |   |     |   |   |
|   |   | 31       |   | Rule 13a-14(a) Certification  of Principal Executive Officer and Principal Financial Officer. |
|   |   |     |   |   |
|   |   | 32       |   | 18  U.S.C Section 1350 Certification. |

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|              | STONE ARCADE ACQUISITION CORPORATION |
|-------------------|--------------------------------------|
|              |                                 |   |
|              |                                 |   |
| May 12, 2006 | By:                                  | /s/ Roger Stone |   |
|              |                                 | Roger Stone |
|              |                                 | Chairman of the Board and Chief Executive  Officer |

 

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