** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q/A**

** **

**AMENDMENT NO. 1**

** **

**x****                             ****QuarterlyReport Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

**For the quarterly period endedSeptember 30, 2006.**

**or**

**o****                                ****ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

**For the transition periodfrom                         to                          .**

**Commission File Number:000-51444**

** **

**Stone Arcade Acquisition Corporation**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                     |   | **20-2699372**       |
|----------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer     |
| Incorporation or  Organization)  |   | Identification  No.) |

 

**c/o Stone-KaplanInvestments, LLC, One Northfield Plaza, 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 to befiled by Section 13 or 15(d) of the Exchange Act during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

Yes xNo o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of theExchange Act).
| Large Accelerated Filer  o | Accelerated  Filer o | Non-Accelerated  Filer x |
|----------------------------|----------------------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).Yes x No o

There were 25,000,000 shares of the Registrant’sCommon Stock issued and outstanding on November 10, 2006.

 

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**EXPLANATORY NOTE**

This Amendment No. 1 on Form 10-Q/A(“Form 10-Q/A”) to the Company’s Quarterly Report on Form 10-Q forthe period ended September 30, 2006, initially filed with the Securities andExchange Commission on November 13, 2006 (the “Original Filing”), reflectschanges to the notes to the financial statements relating to the exerciseprovisions of the Company’s warrants. This Form 10-Q/A amends and restates(i) Item 1. Financial Statements.  Inaddition, the Original Filing has been amended to contain currently datedcertifications from the Company’s Chief Executive Officer and Chief FinancialOfficer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act(See Exhibits 31 and 32).

Except to the extent modified or updated, theforegoing items have not been amended to reflect other events occurring afterthe Original Filing or to modify or update those disclosures affected bysubsequent events. Other events occurring after the filing of the OriginalFiling or other disclosures necessary to reflect subsequent events have beenaddressed in the Company’s reports filed with the Securities and ExchangeCommission subsequent to the filing of the Original Filing. 

**Stone Arcade Acquisition Corporation Index to Form10-Q**

**TABLE OF CONTENTS**

| PART I. — FINANCIAL  INFORMATION                                              |   |
|------------------------------------------------------------------------------------|--------|
|                                                                               |   |
| Item 1. — FINANCIAL STATEMENTS (UNAUDITED) AND NOTES  TO FINANCIAL STATEMENTS |   |
|                                                                               |   |
| PART  II. — OTHER INFORMATION                                                 |   |
|                                                                               |   |
| Item 6. —  EXHIBITS                                                           |   |
|                                                                               |   |
| SIGNATURES                                                                         |   |

 

i

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**Stone Arcade Acquisition Corporation****(adevelopment stage company)********CondensedConsolidated Balance Sheets**
| ** **                                                                                                                                                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2006**               | ** **  | **2005**              | ** ** |
| ** **                                                                                                                                                                      | ** ** | **(unaudited)**        | ** **  |
| **Assets**                                                                                                                                                                      |       |                   |        |                  |       |
| Current assets:                                                                                                                                                                 |       |                   |        |                  |       |
| Cash                                                                                                                                                                            |       | $                      | 773,016     |                  | $          | 2,157,611 |   |
| Restricted cash  and equivalents, held in trust                                                                                                                                 |       | 114,574,151            |        | 111,965,034           |       |
| Prepaid expenses                                                                                                                                                                |       | 33,626                 |        | 128,875               |       |
| Total current assets                                                                                                                                                            |       | 115,380,793            |        | 114,251,520           |       |
| Deferred acquisition  cost                                                                                                                                                      |       | 1,829,382              |        | —                |       |
| Deferred income taxes                                                                                                                                                           |       | 335,260                |        | 54,094                |       |
| Total assets                                                                                                                                                                    |       | $                      | 117,545,435 |                  | $          | 114,305,614 |   |
|                                                                                                                                                                            |       |                   |        |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                  |       |                   |        |                  |       |
| Current liabilities:                                                                                                                                                            |       |                   |        |                  |       |
| Accrued expenses                                                                                                                                                                |       | $                      | 1,381,177   |                  | $          | 136,338 |   |
| Deferred income  taxes                                                                                                                                                          |       | 82,357                 |        | 90,521                |       |
| Total current  liabilities                                                                                                                                                      |       | 1,463,534              |        | 226,859               |       |
|                                                                                                                                                                            |       |                   |        |                  |       |
| Common stock, subject  to possible redemption-3,998,000 shares                                                                                                                  |       | 22,159,715             |        | 22,159,715            |       |
| Interest income  attributable to common stock subject to possible redemption (net of taxes of  $266,050 and $97,061 at September 30, 2006 and December 31, 2005,  respectively) |       | 699,266                |        | 189,462               |       |
|                                                                                                                                                                            |       | 22,858,981             |        | 22,349,177            |       |
| Commitments and  contingencies (Note E)                                                                                                                                         |       |                   |        |                  |       |
|                                                                                                                                                                            |       |                   |        |                  |       |
| Stockholders’ equity:                                                                                                                                                      |       |                   |        |                  |       |
| Preferred stock  $.0001 par value; 1,000,000 shares authorized; no 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 subject to possible redemption)            |       | 2,500                  |        | 2,500                 |       |
| Additional  paid-in capital                                                                                                                                                     |       | 91,098,761             |        | 91,098,761            |       |
| Income  accumulated during the development stage                                                                                                                                |       | 2,121,659              |        | 628,317               |       |
| Total stockholders’  equity                                                                                                                                                |       | 93,222,920             |        | 91,729,578            |       |
| Total liabilities and  stockholders’ equity                                                                                                                                |       | $                      | 117,545,435 |                  | $          | 114,305,614 |   |

 

See notes to condensed unauditedfinancial statements.

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**Stone Arcade Acquisition Corporation**

**(a development stage company)**

**Condensed Consolidated Statementsof Operations**

**(unaudited)**
| ** **                                                                                            | ** ** | ** **                        | ** ** | ** **             | ** ** | **Nine Months**   | ** ** | **(April 15,   2005)** | ** ** | **Accumulated  Inception** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|------------------------|------------|------------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                                                                                            | ** ** | ** **                        | ** ** | ** **             | ** ** | **Ended**              | ** ** | **Through**                      | ** ** | **Through**                | ** ** |
| ** **                                                                                            | ** ** | **Ended September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,**           | ** ** |
| ** **                                                                                            | ** ** | **2006**                          | ** ** | **2005**               | ** ** | **2006**               | ** ** | **2005**                         | ** ** | **2006**                   | ** ** |
| Cost and expenses:                                                                                    |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Operating  expenses                                                                                   |       | $                                 | 373,519    |                   | $          | 37,799                 |       | $                                | 891,687    |                       | $          | 38,799 |   | $ | 1,112,287 |   |
|                                                                                                  |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Other income:                                                                                         |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Bank interest                                                                                         |       | 10,130                            |       | 7,839                  |       | 58,493                 |       | 7,839                            |       | 82,633                     |       |
| Interest on  restricted cash and cash equivalents, held in trust                                      |       | 1,385,661                         |       | 422,341                |       | 3,864,094              |       | 422,341                          |       | 5,300,112                  |       |
| Total other income                                                                                    |       | 1,395,791                         |       | 430,180                |       | 3,922,587              |       | 430,180                          |       | 5,382,745                  |       |
| Income before provision  for income taxes:                                                            |       | 1,022,272                         |       | 392,381                |       | 3,030,900              |       | 391,381                          |       | 4,269,958                  |       |
| Provision (benefit) for  income taxes:                                                                |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Current                                                                                               |       | 423,545                           |       | 71,725                 |       | 1,297,017              |       | 71,725                           |       | 1,681,869                  |       |
| Deferred                                                                                              |       | (72,673                           | )          | 61,345                 |       | (269,263               | )          | 61,345                           |       | (232,836                   | )          |
| Total provision for  income taxes                                                                     |       | 350,872                           |       | 133,070                |       | 1,027,754              |       | 133,070                          |       | 1,449,033                  |       |
| Net income                                                                                            |       | 671,400                           |       | 259,311                |       | 2,003,146              |       | 258,311                          |       | 2,820,925                  |       |
| Deferred interest, net  of taxes, attributable to common stock subject to possible redemption         |       | (182,815                          | )          | (55,721                | )          | (509,804               | )          | (55,721                          | )          | (699,266                   | )          |
|                                                                                                  |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Net income allocable to  holders of nonredeemable common stock                                        |       | $                                 | 488,585    |                   | $          | 203,590                |       | $                                | 1,493,342  |                       | $          | 202,590 |   | $ | 2,121,659 |   |
|                                                                                                  |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Weighted-average number  of shares outstanding:                                                       |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Basic                                                                                                 |       | 25,000,000                        |       | 14,130,435             |       | 25,000,000             |       | 10,000,000                       |       | 20,272,045                 |       |
| Diluted                                                                                               |       | 29,539,007                        |       | 15,131,503             |       | 28,963,964             |       | 10,548,204                       |       | 23,348,428                 |       |
|                                                                                                  |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Net income per share:                                                                                 |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Basic                                                                                                 |       | $                                 | 0.03       |                   | $          | 0.02                   |       | $                                | 0.08       |                       | $          | 0.03 |   | $ | 0.14 |   |
| Diluted                                                                                               |       | $                                 | 0.02       |                   | $          | 0.02                   |       | $                                | 0.07       |                       | $          | 0.02 |   | $ | 0.12 |   |
|                                                                                                  |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Weighted-average number  of shares outstanding exclusive of shares subject to possible redemption:    |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Basic                                                                                                 |       | 21,002,000                        |       | 12,305,261             |       | 21,002,000             |       | 9,000,500                        |       | 17,219,163                 |       |
| Diluted                                                                                               |       | 25,541,007                        |       | 13,306,329             |       | 24,965,964             |       | 9,548,704                        |       | 20,295,546                 |       |
|                                                                                                  |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Net income per share  exclusive shares and related deferred interest subject to possible  redemption: |       |                              |       |                   |       |                   |       |                             |       |                       |       |
| Basic                                                                                                 |       | $                                 | 0.02       |                   | $          | 0.02                   |       | $                                | 0.07       |                       | $          | 0.02 |   | $ | 0.12 |   |
| Diluted                                                                                               |       | $                                 | 0.02       |                   | $          | 0.02                   |       | $                                | 0.06       |                       | $          | 0.02 |   | $ | 0.10 |   |

 

See notes to condensed unauditedfinancial statements.

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**Stone Arcade Acquisition Corporation**

**(a development stage company)**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**

 
| ** **                                                                  | ** ** | ** **                       | ** ** | **Inception**                    | ** ** | **Accumulated**                  | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **Nine Months**             | ** ** | **(April 15, 2005)**   | ** ** | **(Inception)**                  | ** ** |
| ** **                                                                  | ** ** | **Ended**                        | ** ** | **Through**                      | ** ** | **Through**                      | ** ** |
| ** **                                                                  | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** | **September 30, 2006** | ** ** |
| **Operating activities**                                                    |       |                             |       |                             |       |                             |       |
| Net income                                                                  |       | $                                | 2,003,146  |                             | $          | 258,311                          |       | $ | 2,820,925 |   |
| Deferred income  taxes                                                      |       | (281,166                         | )          | —                           |       | (335,260                         | )          |
| Changes in                                                                  |       |                             |       |                             |       |                             |       |
| Interest  receivable on restricted cash and cash equivalents, held in trust |       | 24,013                           |       |                             |       | (242,226                         | )          |
| Prepaid expenses                                                            |       | 95,249                           |       | (180,425                         | )          | (33,626                          | )          |
| Accrued expenses                                                            |       | 1,192,756                        |       | 61,154                           |       | 1,269,241                        |       |
| Accrued income  taxes                                                       |       | 43,920                           |       | 133,070                          |       | 194,293                          |       |
|                                                                        |       |                             |       |                             |       |                             |       |
| Net cash provided by  operating activities                                  |       | 3,077,918                        |       | 272,110                          |       | 3,673,347                        |       |
|                                                                        |       |                             |       |                             |       |                             |       |
| **Investing activities**                                                    |       |                             |       |                             |       |                             |       |
| Acquisition cost paid                                                       |       | (1,829,382                       | )          | —                           |       | (1,829,382                       | )          |
| Purchase of U.S.  government securities held in trust                       |       | (1,135,849,131                   | )          | (111,276,341                     | )          | (1,582,658,925                   | )          |
| Maturities of U.S.  government securities held in trust                     |       | 1,133,216,000                    |       | —                           |       | 1,468,327,000                    |       |
| Net cash used in  investing activities                                      |       | (4,462,513                       | )          | (111,276,341                     | )          | (116,161,307                     | )          |
|                                                                        |       |                             |       |                             |       |                             |       |
| **Financing activities**                                                    |       |                             |       |                             |       |                             |       |
| Proceeds from public  offering, net of expenses                             |       | —                           |       | 113,243,061                      |       | 113,235,876                      |       |
| Proceeds from sale of  common stock to founding stockholders                |       | —                           |       | 25,000                           |       | 25,000                           |       |
| Proceeds from notes  payable to stockholders                                |       | —                           |       | 200,000                          |       | 200,000                          |       |
| Repayment of notes  payable to stockholders                                 |       | —                           |       | (200,000                         | )          | (200,000                         | )          |
| Proceeds from issuance  of underwriters’ option                        |       | —                           |       | 100                              |       | 100                              |       |
| Net cash provided by  financing activities                                  |       | —                           |       | 113,268,161                      |       | 113,260,976                      |       |
|                                                                        |       |                             |       |                             |       |                             |       |
| Net (decrease) increase  in cash                                            |       | (1,384,595                       | )          | 2,263,930                        |       | 773,016                          |       |
| Cash-beginning of  period                                                   |       | 2,157,611                        |       | —                           |       | —                           |       |
| Cash-end of period                                                          |       | $                                | 773,016    |                             | $          | 2,263,930                        |       | $ | 773,016 |   |

 

See notes to condensed unauditedfinancial statements.

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**STONE ARCADE ACQUISITION CORPORATION (A DEVELOPMENT STAGE COMPANY)NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**

**Note A.    Organization and BusinessOperations**

StoneArcade Acquisition Corporation (the “Company”) was incorporated in Delaware onApril 15, 2005. On May 25, 2006, the Company formed a wholly-ownedsubsidiary, KapStone Kraft Paper Corporation, or KapStone Kraft. The Companywas formed to serve as a vehicle for the acquisition through a merger, capitalstock exchange, asset acquisition, or other similar business combination (“BusinessCombination”) of an operating business in the paper, packaging, forest productsand related industries. The Company has neither engaged in any operations norgenerated operating revenue. The Company is considered to be in the developmentstage and is subject to the risks associated with activities of developmentstage companies. The Company has selected December 31 as its fiscal yearend.

The registration statement for the Company’s initialpublic offering (the “Offering”) was declared effective on August 15,2005. The Company consummated the Offering on August 19, 2005 and receivednet proceeds of approximately $113,236,000 of which approximately $110,854,000was placed into a trust account (“Trust Account”). The Company’s management hasbroad discretion with respect to the specific application of the net proceedsof the Offering (as described in Note C), although substantially all ofthe net proceeds of the Offering are intended to be generally applied toward aBusiness Combination. Furthermore, there is no assurance that the Company willbe able to successfully effect a Business Combination. As of September 30,2006, of the net proceeds, $114,574,151, including interest earned of$5,300,112, net of taxes, is being held in the Trust Account and invested inU.S. Government securities until the earlier of (i) the consummation ofthe first Business Combination or (ii) the distribution of the TrustAccount as described below.  Although taxpayments are made from the Trust Account as required on the interest incomeearned by the Trust Account, the interest income is subject to additional taxesincurred, but not yet paid as of September 30, 2006.

Theremaining proceeds may be used to pay for business, legal and accounting duediligence on prospective business combinations and continuing general andadministrative expenses. The Company, after signing a definitive agreement fora Business Combination on June 30, 2006, will submit such transaction forstockholder approval. In the event that holders of 20 percent or more ofthe shares issued in the Offering (the “IPO Shares”) vote against the BusinessCombination and seek to have their shares redeemed, the Business Combinationwill not be consummated. If a majority of stockholders vote in favor of theBusiness Combination and holders of less than 20 percent of the sharesissued in the offering vote against the Business Combination and elect to havetheir shares redeemed, the Business Combination will be consummated.  Stockholders voting against the BusinessCombination will have their stock redeemed for approximately $5.54 per share,plus interest allocable to such shares, net of income taxes. The maximum numberof shares subject to possible redemption is approximately 3,998,000. AtSeptember 30, 2006, the Company has classified $22,858,981 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 effective date of the Offering, or 24 months fromthe effective date of the Offering if certain extension criteria have beensatisfied (the “Acquisition Period”), the proceeds held in the Trust Accountwill be distributed to the Company’s public stockholders (i.e. excluding thepersons who were stockholders prior to the Offering (the “Founding Stockholders”)to the extent of their initial stock holdings.) However, the Founding Stockholderswill participate in any liquidation distribution with respect to any shares ofcommon stock they acquired in connection with or following the Offering. In theevent of such distribution, it is likely that the per share value of theresidual assets remaining available for distribution (including Trust Accountassets) will be less than the initial public offering price per share in theOffering (assuming no value is attributed to the Warrants contained in theUnits in the Offering discussed in Note C).

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**Note B.    Basis of Presentation,Principles of Consolidation, Use of Estimates and Reclassifications**

Theaccompanying condensed unaudited interim financial statements have beenprepared in accordance with U.S. generally accepted accounting principles (“USGAAP”) pursuant to the rules and regulations of the Securities and ExchangeCommission (the”SEC”).  Accordingly, theydo not include all of the information and footnotes required by US GAAP forcomplete financial statements. In the opinion of management, all normalrecurring adjustments considered necessary for a fair presentation have beenincluded. The consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiary. The results of operations for the ninemonth period ended September 30, 2006 are not necessarily indicative ofthe results to be expected for the year ending December 31, 2006.

Thecondensed balance sheet at December 31, 2005 has been derived from theaudited financial statements at that date, but does not include all of theinformation and footnotes required by US GAAP for complete financialstatements.

Forfurther information, refer to the financial statements and footnotes theretoincluded in Stone Arcade Acquisition Corporation’s Annual Report onForm 10-K for the period from April 15, 2005 (date of inception) toDecember 31, 2005.

The preparation of financial statements inconformity with US GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of expenses during the reportingperiod. Actual results could differ from those estimates.

**Note C.    Initial Public Offering**

OnAugust 19, 2005, the Company sold 20,000,000 units (“Units”) for a grossprice of $6.00 per Unit. Each Unit consists of one share of the Company’scommon stock, $.0001 par value, and two warrants (“Warrants”). Each Warrantentitles the holder to purchase from the Company one share of common stock atan exercise price of $5.00. Each warrant is exercisable on the later of(a) the completion of a Business Combination or (b) August 15,2006, and expires on August 15, 2009. The Warrants are redeemable at aprice of $.01 per Warrant upon 30 days notice after the Warrants becomeexercisable, only in the event that the last sale price of the common stock isat least $8.50 per share for any 20 trading days within a 30 trading day periodending on the third day prior to the date on which notice of redemption is given.

In connection with the Offering, the Company paid theunderwriters an underwriting discount of five percent of the gross proceeds ofthe Offering. The Company also issued for $100 an option to the representativeof the underwriters to purchase up to a total of 1,000,000 units at a price of$7.50 per unit. The units issuable upon the exercise of this option areidentical to those offered in the prospectus, except that the exercise price ofthe warrants included in the underwriters’ purchase option is $6.25. Thisoption is exercisable 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. The optionmay not be sold, transferred, assigned, pledged or hypothecated untilAugust 16, 2006. However, the option may be transferred to any underwriteror selected dealer participating in the Offering and their bona fide officersor partners.

The underwriters’ purchase option and the Warrants (includingthe warrants underlying the underwriters’ option) will be exercisable only ifat the time of exercise a current registration statement covering theunderlying securities is effective or, in the opinion of counsel, not required,and if the securities are qualified for sale or exempt from qualification underthe applicable state securities laws of the exercising holder.  The Company is obligated to use its bestefforts to maintain an effective registration statement during the term of the optionand the Warrants; however, it may be unable to do so.  Holders of the option and the Warrants arenot entitled to receive a net cash settlement or other settlement in lieu ofphysical settlement if the common stock underlying the Warrants, or securitiesunderlying the option, as applicable, are not covered by an effectiveregistration statement.  Accordingly, theWarrants, which do not have a cashless exercise provision, may expireunexercised and worthless if a current registration statement covering thecommon stock is not effective.

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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 prospectus 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 cashpayment, as an expense of the Offering resulting in a charge directly tostockholders’ equity. Accordingly there was no impact in the Company’sfinancial position or results of operations except for the recording of the$100 proceeds from the sale.

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 such warrants will not be sold or transferred untilthe completion of a Business Combination.

**Note D.    Related-PartyTransactions**

TheCompany has agreed to pay Stone-Kaplan Investments, LLC, a company 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 date of aBusiness Combination. Stone-Kaplan Investments LLC has agreed to pay a portionof the aforementioned administration fee to Arcade Partners LLC, a company wherecertain of the Founding Stockholders serve in executive capacities. From timeto time the Company retains the services of White Oak Aviation, an aviationservices company solely owned by certain Founding Stockholders. For the threeand nine months ended September 30, 2006, the amount paid to this entity was$34,787 and $61,537, respectively.

TheFounding Stockholders have agreed with the Company and the underwriters that ifthe Company liquidates prior to the consummation of a Business Combination, theFounding Stockholders will be personally liable to pay debts and obligations tovendors that are owed money by the Company for services rendered or productssold to the Company to the extent such debts were not paid from the netproceeds not held in the Trust Account at that time.

**Note E.    Commitments andContingencies**

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 forIssuance**

AtSeptember 30, 2006, 43,000,000 shares of common stock were reserved forissuance upon exercise of warrants and the underwriter’s option.

**Note G.    Purchase Agreement forProposed Business Combination**

OnJune 23, 2006, Stone, KapStone Kraft, and International Paper Company, orIP, entered into a Purchase Agreement. The Purchase Agreement provides for theacquisition of substantially all of the assets and the assumption of certainliabilities of the Kraft Papers Business, or KPB, a division of IP, consistingof an unbleached kraft paper manufacturing facility in Roanoke Rapids, NorthCarolina and Ride Rite® Converting, an inflatable dunnage bag manufacturerlocated in Fordyce, Arkansas, for a cash purchase 

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price of$155 million plus two contingent earn-out payments of up to$35 million and $25 million, based on KPB’s annual earnings beforeinterest, income taxes, depreciation and amortization, or EBITDA, during thefive years immediately following the acquisition. The purchase price payable onthe closing date will be adjusted dollar-for-dollar to the extent IP’s workingcapital as of such date is greater or less than $42,637,709.

KPBgenerated approximately $189.2 million in sales and $25.1 million inoperating income for the nine months ended September 30, 2006 and approximately$222.0 million in sales and $9.5 million in operating income for theyear ended December 31, 2005.

TheCompany intends to use its proceeds of its initial public offering, whichincludes $114,574,151, including interest earned, currently held in the TrustAccount, together with borrowings from a $95,000,000 senior secured creditfacility to be obtained in connection with the acquisition to acquire the KPBassets, to pay transaction expenses, and to pay holders of the IPO Shares whoexercise their redemption rights.

Theproposed acquisition is subject to, among other things, the approval of thetransaction by the Company’s stockholders. There can be no assurance that thetransaction will be consummated.

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**PART II.— OTHER INFORMATION**

**Item 6. —****    EXHIBITS**

(b)     Exhibits
| 4.7      |   | Amended and Restated Unit Purchase Option  Clarification Agreement, by and between Stone Arcade Acquisition  Corporation  and Morgan Joseph &  Co. Inc. |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                             |
| 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**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. 
|                   | STONE ARCADE ACQUISITION CORPORATION |
|-------------------|--------------------------------------|
|              |                                 |
| December 12, 2006 | By:                                  | /s/ Roger Stone |
|              |                                 | Roger Stone |
|              |                                 | Chairman of the Board  and Chief Executive Officer |

 

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